FOMC Mins December

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Minutes of the Federal Open Market CommitteeDecember 1112, 2012

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, December 11, 2012, at 11:00 a.m. and continuedon Wednesday, December 12, 2012, at 8:30 a.m.

PRESENT:Ben Bernanke, ChairmanWilliam C. Dudley, Vice ChairmanElizabeth DukeJeffrey M. LackerDennis P. LockhartSandra PianaltoJerome H. PowellSarah Bloom RaskinJeremy C. SteinDaniel K. TarulloJohn C. WilliamsJanet L. Yellen

James Bullard, Christine Cumming, Charles L. Evans,Esther L. George, and Eric Rosengren, AlternateMembers of the Federal Open Market Committee

Richard W. Fisher, Narayana Kocherlakota, andCharles I. Plosser, Presidents of the Federal Re-serve Banks of Dallas, Minneapolis, and Philadel-

phia, respectively

William B. English, Secretary and EconomistDeborah J. Danker, Deputy SecretaryMatthew M. Luecke, Assistant SecretaryMichelle A. Smith, Assistant SecretaryScott G. Alvarez, General CounselSteven B. Kamin, EconomistDavid W. Wilcox, Economist

David Altig, Thomas A. Connors, Michael P. Leahy,William Nelson, David Reifschneider, and William

Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

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

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

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

ernors; Maryann F. Hunter, Deputy Director, Divi-sion of Banking Supervision and Regulation, Boardof 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, Thomas Laubach, and David E. Le-bow, Associate Directors, Division of Researchand Statistics, Board of Governors; Michael T. Ki-ley, Associate Director, Office of Financial Stabil-ity Policy and Research, Board of Governors

Joshua Gallin, Deputy Associate Director, Division ofResearch and Statistics, Board of Governors; JaneE. Ihrig, Deputy Associate Director, Division ofMonetary Affairs, Board of Governors; Beth AnneWilson, Deputy Associate Director, Division of In-ternational Finance, Board of Governors

David H. Small, Project Manager, Division of Mone-tary Affairs, Board of Governors

Jennifer E. Roush, Senior Economist, Division ofMonetary Affairs, Board of Governors

Marie Gooding, First Vice President, Federal ReserveBank of Atlanta

Loretta J. Mester and Daniel G. Sullivan, ExecutiveVice Presidents, Federal Reserve Banks of Phila-delphia and Chicago, respectively

Troy Davig, Mark E. Schweitzer, Geoffrey Tootell,

Christopher J. Waller, and Kei-Mu Yi, Senior VicePresidents, Federal Reserve Banks of Kansas City,Cleveland, Boston, St. Louis, and Minneapolis, re-spectively

Mary Daly, Group Vice President, Federal ReserveBank of San Francisco

_______________________ Attended Tuesdays session only.

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Evan F. Koenig, Lorie K. Logan, Julie Ann Remache,

Alexander L. Wolman, and Nathaniel Wuerffel,Vice Presidents, Federal Reserve Banks of Dallas,New York, New York, Richmond, and New York,respectively

Argia M. Sbordone, Assistant Vice President, FederalReserve Bank of New York

Developments in Financial Markets and the Fed-eral Reserves Balance SheetThe Manager of the System Open Market Account(SOMA) reported on developments in domestic andforeign financial markets during the period since theFederal Open Market Committee (FOMC) met on Oc-tober 2324, 2012. He also reported on System open

market operations over the intermeeting period, includ-ing the ongoing reinvestment into agency-guaranteedmortgage-backed securities (MBS) of principal pay-ments received on SOMA holdings of agency debt andagency-guaranteed MBS; the operations related to thematurity extension program authorized at the June 1920, 2012, FOMC meeting; and the purchases of MBSauthorized at the September 1213, 2012, FOMCmeeting. By unanimous vote, the Committee ratifiedthe Open Market Desks domestic transactions overthe intermeeting period. There were no interventionoperations in foreign currencies for the Systems ac-count over the intermeeting period.

The Committee considered a proposal to extend itsliquidity swap arrangements with foreign central bankspast February 1, 2013. All but one member approvedthe following resolution:

The Federal Open Market Committee di-rects the Federal Reserve Bank of New Yorkto extend the existing temporary dollar li-quidity swap arrangements with the Bank ofCanada, the Bank of England, the Bank ofJapan, the European Central Bank, and theSwiss National Bank through February 1,

2014. In addition, the Federal Open MarketCommittee directs the Federal Reserve Bankof New York to extend the existing tempo-rary foreign currency liquidity swap arrange-ments with the Bank of Canada, the Bank ofEngland, the Bank of Japan, the EuropeanCentral Bank, and the Swiss National Bankthrough February 1, 2014.

Mr. Lacker dissented because of his opposition to ar-rangements that support Federal Reserve lending inforeign currencies, which he viewed as amounting tofiscal policy.

Options for the Continuation of Asset PurchasesThe staff reviewed several options for purchasing long-er-term securities after the planned completion at theend of the month of the maturity extension program.The presentation focused on the potential effects forthe U.S. economy, based in part on simulations of astaff macroeconomic model, and for the Federal Re-serves balance sheet and income of continuing to buyMBS and longer-term Treasury securities over varioustime frames. In their discussion of the staff presenta-tion, some participants asked about the possible conse-quences of the alternative purchase programs for theexpected path of Federal Reserve remittances to theTreasury Department, and a few indicated the need for

additional consideration of the implications of suchpurchases for the eventual normalization of the stanceof monetary policy and the size and composition of theFederal Reserves balance sheet.

Staff Review of the Economic SituationThe information reviewed at the December 1112meeting indicated that economic activity continued toincrease at a moderate pace in recent months. Em-ployment expanded further, and the unemploymentrate declined slightly, on balance, from September toNovember but was still elevated. Consumer price infla-tion slowed as consumer energy costs fell, while

measures of longer-run inflation expectations remainedstable.

Private nonfarm employment increased at a slightlyfaster rate in October and November than in the thirdquarter, but government employment decreased some-what. The unemployment rate declined to 7.7 percentin November, and the labor force participation rate inthat month was at the same level as in the third quarter.The relatively large share of workers employed parttime for economic reasons trended up a bit, on net,while the share of long-duration unemployment in totalunemployment was essentially flat and remained elevat-ed. Indicators of firms job openings and hiring planswere little changed on balance. Initial claims for un-employment insurance were boosted in early Novem-ber by the effects of Hurricane Sandy but returnedwithin weeks to a level that was about the same as be-fore the hurricane.

Manufacturing production declined in October, as out-put was held down at the end of the month by the dis-

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ruptions and damage caused by Hurricane Sandy; therate of manufacturing capacity utilization also declined.Automakers schedules indicated that the pace of mo-tor vehicle assemblies would rise somewhat in the com-ing months. Broader indicators of factory output, suchas the diffusion indexes of new orders from the nation-

al and regional manufacturing surveys, continued to besubdued at levels consistent with only small gains inproduction in the near term.

Real personal consumption expenditures rose at amodest pace in the third quarter, but spending declinedin October, likely in response in part to some disrup-tions caused by the hurricane. Probably reflectingthose disruptions, sales of light motor vehicles fell inOctober but then increased notably in November.Some factors that tend to influence household spend-ing became less supportive: Real disposable personalincome moved up only slightly in the third quarter and

declined in October. Moreover, consumer sentimentfell back in early December to about its level during thesummer. In contrast, household net worth increased inthe third quarter, partially a result of higher equity andhome values.

Conditions in the housing market continued to im-prove gradually, but construction activity was still at alow level, restrained by the considerable inventory offoreclosed and distressed homes and the tight creditstandards for mortgages. Starts and permits of newsingle-family homes were essentially flat in Octoberafter rising significantly in the preceding month. Starts

of new multifamily units rose in October, althoughpermits declined somewhat following their brisk in-crease in the previous month. Meanwhile, home pricesadvanced further and sales of existing homes continuedto expand, but new home sales were little changed.

Real business expenditures on equipment and softwaredecreased in the third quarter. In October, nominalnew orders for nondefense capital goods excludingaircraft moved up a little, but shipments of these capitalgoods edged down and the level of orders remainedbelow that of shipments. In addition, other forward-looking indicators of equipment investment by firms,such as surveys of business conditions and capitalspending plans, were still subdued. Real business ex-penditures for nonresidential structures also decreasedin the third quarter, although nominal constructionspending by firms increased in October. Inventories inmost industries appeared to be roughly aligned withsales in recent months.

Real federal government purchases increased markedlyin the third quarter, led by a sharp rise in defensespending. However, data for nominal federal spendingin October pointed toward a decline in real defenseexpenditures in the fourth quarter. Real state and localgovernment purchases were little changed in the third

quarter. State and local government payrolls decreasedon net over October and November, and nominal con-struction spending by these governments edged lowerin October.

The U.S. international trade deficit widened in October,and both exports and imports fell sharply from theprevious month. The decrease in exports was wide-spread across categories, while the reduction in importsimportantly reflected lower purchases of consumergoods and non-oil industrial supplies, although petrole-um imports increased.

Consumer prices moved up more slowly in Octoberthan in the preceding few months, primarily because ofa small decline in energy prices after several months oflarge gains. Moreover, survey data indicated that retailgasoline prices decreased further in November. Con-sumer food prices rose a little faster in October, as theeffects of last summers drought started to showthrough at the retail level. Increases in consumer pricesexcluding food and energy remained subdued. Near-term inflation expectations from the Thomson Reu-ters/University of Michigan Surveys of Consumersedged up, on balance, in November and early Decem-ber, while longer-term inflation expectations in the sur-

vey were little changed and continued to run within therelatively narrow range that has prevailed for sometime.

Measures of labor compensation indicated that gains innominal wages remained slow. Compensation per hourin the nonfarm business sector increased slightly overthe year ending in the third quarter, and with a moder-ate rise in productivity, unit labor costs were essentiallyunchanged. The employment cost index rose only a bitfaster than the measure of compensation per hour overthe same period. In October and November, increasesin average hourly earnings for all employees were small.

Economic activity abroad remained subdued, especiallyin the advanced foreign economies. The euro-areaeconomy contracted further in the third quarter, andconsumer and business confidence remained low.Economic activity in Japan also declined in the thirdquarter, and a sharp drop in exports restrained eco-nomic growth in Canada. In emerging market econo-mies, by contrast, recent data on exports and manufac-

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turing improved somewhat. In most countries, infla-tion was still well contained, and monetary policyabroad generally remained accommodative.

Staff Review of the Financial SituationU.S. financial conditions were little changed, on bal-ance, over the intermeeting period. In early November,market concerns about the fiscal outlook and ongoingfederal budget negotiations seemed to intensify,prompting a notable reduction in equity prices andyields on Treasury securities. But these concerns re-portedly eased somewhat over subsequent weeks, andthe initial move in equity prices was reversed. In con-trast, yields on intermediate- and long-term nominalTreasury securities declined, on net, perhaps reflectingsome increase in safe-haven demand associated withconcerns about the potential economic effects of a sub-stantial tightening in fiscal policy. Indicators of infla-tion compensation derived from nominal and inflation-

protected Treasury securities showed mixed changesand remained within the ranges observed over recentyears.

The expected path of the federal funds rate derivedfrom overnight index swap rates flattened somewhat,on balance, over the intermeeting period, as longer-dated rates declined. Market-based measures of uncer-tainty about the path of the federal funds rate beyondthe near term also declined. The survey of primarydealers conducted prior to the December meetingshowed that they expected the FOMC to maintain pur-chases of longer-term securities after year-end at about

the current pace of $85 billion per month.

Conditions in unsecured and secured short-term dollarfunding markets remained stable, on net, over the in-termeeting period, with reports of only limited disrup-tions to trading or operations following HurricaneSandy. Yields on Treasury bills maturing beyond theyear-end were noticeably lower than those on shorter-term bills; market participants pointed to the anticipat-ed ending of the Federal Reserves maturity extensionprogram and the expiration of the Federal Deposit In-surance Corporations unlimited insurance of noninter-est-bearing transaction deposits at the end of the yearas factors contributing to this pattern of yields.

In the December Senior Credit Officer Opinion Surveyon Dealer Financing Terms, respondents reported littlechange in credit terms over the past three months forimportant classes of dealer counterparties. While re-spondents reported that the use of leverage by coun-terparties had remained basically unchanged, they noted

greater demand for funding of various types of securiti-zation products.

Broad U.S. equity price indexes edged up, on net, overthe intermeeting period, while equity prices of largedomestic banks decreased a little. Nevertheless, thecredit default swap spreads of most large domesticbank holding companies continued to move lower.Option-implied volatility for the S&P 500 index overthe next month declined moderately, on balance, whilemeasures of equity market volatility for longer maturi-ties remained above their historical averages, excludingthe financial crisis period.

Yields on investment-grade corporate bonds were littlechanged over the intermeeting period, and their spreadsover yields on comparable-maturity Treasury securitieswidened modestly. Yields on speculative-grade corpo-rate bonds fell to historical lows, and their spreads de-

creased slightly.The pace of bond issuance by nonfinancial firms in-creased further in October and November after risingrobustly in the third quarter, as some firms reportedlysought to issue new debt before the end of the year.Commercial and industrial (C&I) loans outstandingalso expanded notably in October and November.Nonfinancial commercial paper outstanding increasedsomewhat in November following a small decline inOctober. In the syndicated leveraged loan market, in-stitutional issuance surged in October before subsidingsomewhat in November, although it remained at a still-

robust level.Financial conditions in the commercial real estate(CRE) sector were still generally strained amid elevatedvacancy and delinquency rates. However, prices forCRE properties continued to increase in the third quar-ter, and issuance of commercial mortgage-backed secu-rities remained at a solid pace in the current quarter.

Residential mortgage rates declined modestly over theintermeeting period, largely in line with the decline inMBS yields. Refinancing expanded a bit further in Oc-tober and November. House prices continued to in-crease despite a rise in the proportion of propertiessold through foreclosures or short sales. The share ofexisting mortgages that were seriously delinquent fell inthe third quarter but remained elevated.

Consumer credit continued to expand briskly in Sep-tember, led by sizable increases in auto and studentloans. Revolving credit decreased in September butwas little changed, on net, over the previous fewmonths. Issuance of consumer asset-backed securities



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The staff viewed the uncertainty around the projectionfor economic activity as somewhat elevated and therisks as skewed to the downside, largely reflecting thepossibility of a more severe tightening in U.S. fiscalpolicy than expected, along with continued concernsabout the economic and financial situation in Europe.

Although the staff saw the outlook for inflation as un-certain, the risks were viewed as balanced and not unu-sually high.

Participants Views on Current Conditions and theEconomic OutlookIn conjunction with this FOMC meeting, meeting par-ticipantsthe 7 members of the Board of Governorsand the presidents of the 12 Federal Reserve Banks, allof whom participate in the deliberations of theFOMCsubmitted their assessments of real outputgrowth, the unemployment rate, inflation, and the tar-get federal funds rate for each year from 2012 through

2015 and over the longer run, under each participantsjudgment of appropriate monetary policy. The longer-run projections represent each participants assessmentof the rate to which each variable would be expected toconverge, over time, under appropriate monetary policyand in the absence of further shocks to the economy.These economic projections and policy assessments aredescribed in the Summary of Economic Projections,which is attached as an addendum to these minutes.

In their discussion of the economic situation, partici-pants regarded the information received during the in-termeeting period as indicating that economic activity

and employment continued to expand at a moderatepace, apart from weather-related disruptions. The un-employment rate had declined somewhat since thesummer but remained elevated. Although householdspending had continued to advance, growth in businessfixed investment had slowed. The housing sector hadshown further signs of improvement. Consumer priceinflation had been running somewhat below the Com-mittees longer-run objective of 2 percent, apart fromtemporary variations that largely reflected fluctuationsin energy prices, and longer-term inflation expectationshad remained stable.

In their assessments of the economic outlook, manyparticipants thought that the pace of economic expan-sion would remain moderate in 2013 before picking upgradually in 2014 and 2015. This outlook was littlechanged from their projections at recent meetings.Hurricane Sandy was expected to weigh on economicgrowth in the current quarter, but rebuilding couldprovide some temporary impetus early in 2013. Partic-

ipants forecasts, which generally were conditioned onthe view that it would be appropriate to maintain ahighly accommodative monetary policy for a consider-able time, included an outlook for a continued gradualdecline in the unemployment rate toward levels judgedto be consistent with the Committees mandate over

the longer run, with inflation running near the Commit-tees 2 percent longer-run goal.

Participants observed that growth in economic activitycontinued to be restrained by several persistent head-winds, including ongoing deleveraging on the part ofhouseholds and still-tight credit conditions for someborrowers, and that a major headwind facing the econ-omy at present appeared to be uncertainty about U.S.fiscal policy and the outcome of the ongoing negotia-tions on federal spending and taxes. While participantsgenerally saw it as likely that the Congress and the Ad-ministration would avert the full force of the tax in-

creases and spending cuts scheduled to occur in 2013,almost all indicated that heightened uncertainty aboutfiscal policy probably was affecting economic activityadversely. For example, it likely had reduced house-hold and business confidence and led firms to deferhiring and investment spending. Some participantsnoted that an early and constructive resolution to fiscalpolicy negotiations had the potential to release pent-updemand and therefore be followed by a boost to spend-ing, investment, and employment; however, a fewpointed out that an extended breakdown of negotia-tions could have significant adverse effects on econom-

ic growth. Other factors weighing on the economicoutlook included the slowdown in global economicgrowth and continued uncertainty regarding the Euro-pean fiscal and banking situation.

In their discussion of the household sector, many par-ticipants noted a recent drop in consumer sentimentand a softening in consumer spending. Some partici-pants thought this reflected uncertainty about fiscalpolicy, including the prospect of higher taxes, and sev-eral noted that growth of households real disposableincome remained weak despite recent gains in employ-ment. While indicators of spending were mixed, pur-

chases of autos and other durables remained relativelystrong. A couple of participants observed that busi-nesses in a few areas had reported strong holiday-related activity. Many pointed out that reductions inhouseholds debt, together with rising home prices, hadled to an improvement in household balance sheets; itwas noted that household net worth was approachinglevels seen before the financial crisis.



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Business contacts in many parts of the country werealso said to be highly uncertain about the outlook forU.S. fiscal policy, and participants noted that this un-certainty appeared to have weighed on investment andhiring decisions. Although firms balance sheets weregenerally strong and liquidity was ample, some business

contacts reported that they had shifted toward a higherproportion of part-time employees and postponedplans to expand capacity. A number of participantssuggested that the business sector was well positionedto expand spending and hiring quickly upon a positiveresolution of the fiscal cliff negotiations. In a few re-gions, contacts reported concerns about the expenseassociated with new regulations, including those relatedto health care, and in some cases indicated a shift to thehiring of part-time workers in order to avoid thesecosts. There were reports of weaker manufacturing,particularly in the Northeast in the aftermath of Hurri-

cane Sandy, and a slackening in economic activity in theSouthwest related in part to cutbacks in defense spend-ing. Export orders had softened, reflecting the slow-down in global growth. The energy sector continued toexpand. In the agricultural sector, farm incomes werehigh, notwithstanding the drought, although elevatedgrain prices were cutting into profits on livestock.

Meeting participants generally agreed that the recoveryin the housing sector had continued. Many comment-ed that the headwinds facing the housing market ap-peared to have dissipated somewhat. The capacity con-straints on the processing of new home-mortgage ap-

plications appeared to be easing, and gradually risinghome prices had reduced the proportion of householdswith underwater mortgages. It was noted that the mixof new home sales seemed to have shifted from homesalready completed to homes not yet built.

In discussing labor market developments, participantsgenerally viewed the recent data as having been some-what better than expected, with moderate gains in pay-roll employment and a decline in the unemploymentrate. However, the unemployment rate remained ele-vated, and part of the decline in unemployment in No-vember was attributable to a drop in labor force partic-

ipation. A few participants noted that some exits fromthe labor force may have been related to the loss orprospective loss of eligibility for emergency unem-ployment insurance benefits. Several pointed to indica-tors suggesting that rates of hiring remained depressedrelative to those observed before the financial crisis. Acouple of participants noted that vacancies remained ata high level in terms of their historical relationship tothe rate of unemployment, suggesting that at least some

firms were having a hard time finding suitable workers;indeed, business contacts in a couple of regions hadreported difficulty in locating and retaining workerswith requisite skills. However, one participant suggest-ed that employerworker mismatch likely reflectedlonger-term problems and had probably not worsened

materially as a result of the recent deep recession andslow recovery.

Incoming information pointed to stable, low inflationthat was running a little below the Committees longer-run goal of 2 percent. Crude oil prices had moveddown since the October meeting amid accumulatinginventories and market concerns about a weaker globaloutlook. Despite some reports of labor shortages incertain industries, compensation pressures had re-mained subdued, and unit labor costs were littlechanged over the previous four quarters. Most partici-pants saw the risks to the inflation outlook as broadly

balanced, and many noted that longer-term inflationexpectations were well anchored. One participant,however, expressed concern that considerable uncer-tainty surrounded the relationship between unemploy-ment and inflation, raising questions about the extentto which resource slack would keep inflation restrainedover the medium term.

In their discussion of financial developments, a fewparticipants commented that recent steps taken by Eu-ropean authorities had reduced volatility in sovereigndebt markets over the intermeeting period; however,concerns remained about the fiscal and economic out-

look in Europe. Many noted the ongoing deleveragingin the private nonfinancial sector of the U.S. economyand indicated that it was difficult to judge when thatprocess would be complete. A few participants, ob-serving that low interest rates had increased the de-mand for riskier financial products, pointed to the pos-sibility that holding interest rates low for a prolongedperiod could lead to financial imbalances and impru-dent risk-taking. One participant suggested that therewere several historical episodes in the United States andother countries that might be used to build a betterunderstanding of the financial strains that could devel-

op from a long period of very low long-term interestrates. Pointing to a recent decision of the FinancialStability Oversight Council, one participant commentedthat further money market mutual fund reform wouldhelp reduce risk in the financial system.

Participants exchanged views on the likely benefits andcosts of additional asset purchases in the context of anassessment of the ongoing purchases of MBS and pos-



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sible additional purchases of longer-term Treasury se-curities to follow the conclusion of the maturity exten-sion program. Regarding the benefits, it was noted thatasset purchases provide support to the economic re-covery by putting downward pressure on longer-terminterest rates and promoting more-accommodative fi-

nancial conditions. Participants discussed the effec-tiveness of purchasing different types of assets and thepotential for the effects on yields from purchases in themarket for one class of securities to spill over to othermarkets. If these spillovers are significant, then pur-chases of longer-term Treasury securities might be pre-ferred, in light of the depth and liquidity of that market.However, if markets are more segmented, purchases ofMBS might be preferred because they would providemore support to real activity through the housing sec-tor. One participant commented that the best ap-proach would be to continue purchases in both the

Treasury and MBS markets, given the uncertainty aboutthe precise channels through which asset purchasesoperated. Others emphasized the advantages of MBSpurchases, including by noting the apparent effective-ness of recent MBS purchases on the housing market,while another participant objected and thought thatFederal Reserve purchases should not direct credit to aspecific sector. With regard to the possible costs andrisks of purchases, a number of participants expressedthe concern that additional purchases could complicatethe Committees efforts to eventually withdraw mone-tary policy accommodation, for example, by potentiallycausing inflation expectations to rise or by impairing

the future implementation of monetary policy. Partici-pants also discussed the implications of continued assetpurchases for the size of the Federal Reserves balancesheet. Depending on the path for the balance sheetand interest rates, the Federal Reserves net income andits remittances to the Treasury could be significantlyaffected during the period of policy normalization.Participants noted that the Committee would need tocontinue to assess whether large purchases were havingadverse effects on market functioning and financialstability. They expressed a range of views on the ap-propriate pace of purchases, both now and as the out-

look evolved. It was agreed that both the efficacy andthe costs would need to be carefully monitored andtaken into account in determining the size, pace, andcomposition of asset purchases.

Meeting participants discussed the possibility of replac-ing the calendar date in the forward guidance for thefederal funds rate with specific quantitative thresholdsof 6 percent for the unemployment rate and 2 per-

cent for projected inflation between one and two yearsahead. Most participants favored replacing the calen-dar-date forward guidance with economic thresholds,and several noted that the consistency between themid-2015 reference in the Committees Octoberstatement and the specific quantitative thresholds being

considered at the current meeting provided an oppor-tunity for a smooth transition. However, possible ad-vantages of waiting a while to introduce the change tothe Committees forward guidance were also men-tioned, including that a delay might simplify communi-cations by keeping the introduction of thresholds sepa-rate from the announcement of additional asset pur-chases. Among the benefits of quantitative thresholdsthat were cited was that they could help the publicmore readily understand how the likely timing of aneventual increase in the federal funds rate would shiftin response to unanticipated changes in economic con-

ditions and the outlook. Accordingly, thresholds couldincrease the probability that market reactions to eco-nomic developments would move longer-term interestrates in a manner consistent with the Committees viewregarding the likely future path of short-term interestrates. A few participants expressed a preference forusing a qualitative description of the economic indica-tors influencing the Committees thinking about cur-rent and future monetary policy rather than quantitativeguidance because they felt that qualitative guidancewould be at least as effective as numerical thresholdswhile avoiding some potential disadvantages, includingthe possibility that the numerical thresholds would bemistakenly interpreted as the Committees longer-runobjectives. A few participants commented that thequantitative thresholds might be interpreted as triggersthat, when reached, would prompt an immediate in-crease in short-term rates. However, a number of par-ticipants indicated that the Chairmans press confer-ence and other avenues of communication could beused to emphasize, for example, the distinction be-tween thresholds and the longer-run objectives as wellas between thresholds and triggers. Participants alsodiscussed the importance of clarifying that the thresh-olds would not be followed mechanically and that a

variety of indicators of labor market conditions andinflation pressures, as well as financial developments,would be taken into account in setting policy.

Committee Policy ActionCommittee members viewed the information receivedover the intermeeting period as suggesting that eco-nomic activity and employment continued to expand ata moderate pace in recent months, abstracting from



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weather-related disruptions. Household spending hadcontinued to advance and the housing sector hadshown further signs of improvement, but growth in thebusiness sector had slowed. Anecdotal evidence indi-cated that uncertainty about U.S. fiscal policy weighedheavily on sentiment in the household and business

sectors. Although the unemployment rate had declinedsomewhat since the summer, it was still elevated rela-tive to levels that members viewed as normal in thelonger run. Members generally agreed that the eco-nomic outlook was little changed since the previousmeeting and judged that, without sufficient policy ac-commodation, economic growth might not be strongenough to generate sustained improvement in labormarket conditions. Furthermore, strains in global fi-nancial markets continued to pose significant downsiderisks to the economic outlook. Inflation had been sub-dued, apart from some temporary variations that largely

reflected fluctuations in energy prices. With longer-term inflation expectations stable, inflation over themedium term was anticipated to run at or below theCommittees longer-run objective of 2 percent.

In their discussion of monetary policy for the periodahead, all members but one judged that continued pro-vision of monetary accommodation was warranted inorder to support further progress toward the Commit-tees goals of maximum employment and price stability.The Committee judged that such accommodationshould be provided in part by continuing to purchaseMBS at a pace of $40 billion per month and by pur-

chasing longer-term Treasury securities, initially at apace of $45 billion per month, following the comple-tion of the maturity extension program at the end ofthe year. The Committee also maintained its existingpolicy of reinvesting principal payments from its hold-ings of agency debt and agency MBS into agency MBSand decided that, starting in January, it will resume roll-ing over maturing Treasury securities at auction. Whilealmost all members thought that the asset purchaseprogram begun in September had been effective andsupportive of growth, they also generally saw that thebenefits of ongoing purchases were uncertain and thatthe potential costs could rise as the size of the balancesheet increased. Various members stressed the im-portance of a continuing assessment of labor marketdevelopments and reviews of the programs efficacyand costs at upcoming FOMC meetings. In consider-ing the outlook for the labor market and the broadereconomy, a few members expressed the view that on-going asset purchases would likely be warranted untilabout the end of 2013, while a few others emphasized

the need for considerable policy accommodation butdid not state a specific time frame or total for purchas-es. Several others thought that it would probably beappropriate to slow or to stop purchases well beforethe end of 2013, citing concerns about financial stabil-ity or the size of the balance sheet. One member

viewed any additional purchases as unwarranted.

With regard to its forward guidance about the federalfunds rate, the Committee decided to indicate in thestatement language that it expects the highly accom-modative stance of monetary policy to remain appro-priate for a considerable time after the asset purchaseprogram ends and the economic recovery strengthens.In addition, all but one member agreed to replace thedate-based guidance with economic thresholds indicat-ing that the exceptionally low range for the federalfunds rate would remain appropriate at least as long asthe unemployment rate remains above 6 percent,

inflation between one and two years ahead is projectedto be no more than a half percentage point above theCommittees longer-run goal, and longer-term inflationexpectations continue to be well anchored. The Com-mittee thought it would be helpful to indicate in thestatement that it viewed the economic thresholds asconsistent with its earlier, date-based guidance. Thenew language noted that the Committee would alsoconsider other information when determining howlong to maintain the highly accommodative stance ofmonetary policy, including additional measures of labormarket conditions, indicators of inflation pressures and

inflation expectations, and readings on financial devel-opments. One member dissented from the policy deci-sion, opposing the new economic threshold language inthe forward guidance, as well as the additional assetpurchases and continued intervention in the MBS mar-ket.

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:

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster price stability and promote sustainablegrowth in output. To further its long-runobjectives, the Committee seeks conditionsin reserve markets consistent with federalfunds trading in a range from 0 to percent.The Committee directs the Desk to completethe maturity extension program it announced



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in June to purchase Treasury securities withremaining maturities of 6 years to 30 yearswith a total face value of about $267 billionby the end of December 2012, and to sell orredeem Treasury securities with remainingmaturities of approximately 3 years or less

with a total face value of about $267 billion.Following the completion of this program,the Committee directs the Desk to resume itspolicy of rolling over maturing Treasury se-curities into new issues. From the beginningof January, the Desk is directed to purchaselonger-term Treasury securities at a pace ofabout $45 billion per month. The Commit-tee directs the Desk to maintain its existingpolicy of reinvesting principal payments onall agency debt and agency mortgage-backedsecurities in the System Open Market Ac-

count in agency mortgage-backed securities.The Desk is also directed to continue pur-chasing agency mortgage-backed securities ata pace of about $40 billion per month. TheCommittee directs the Desk to engage indollar roll and coupon swap transactions asnecessary to facilitate settlement of the Fed-eral Reserves agency MBS transactions. TheSystem Open Market Account Manager andthe Secretary will keep the Committee in-formed of ongoing developments regardingthe Systems balance sheet that could affectthe attainment over time of the Committees

objectives of maximum employment andprice stability.

The vote encompassed approval of the statement be-low to be released at 12:30 p.m.:

Information received since the FederalOpen Market Committee met in Octobersuggests that economic activity and employ-ment have continued to expand at a moder-ate pace in recent months, apart from weath-er-related disruptions. Although the unem-ployment rate has declined somewhat since

the summer, it remains elevated. Householdspending has continued to advance, and thehousing sector has shown further signs ofimprovement, but growth in business fixedinvestment has slowed. Inflation has beenrunning somewhat below the Committeeslonger-run objective, apart from temporaryvariations that largely reflect fluctuations in

energy prices. Longer-term inflation expec-tations have remained stable.

Consistent with its statutory mandate, theCommittee seeks to foster maximum em-ployment and price stability. The Committeeremains concerned that, without sufficientpolicy accommodation, economic growthmight not be strong enough to generate sus-tained improvement in labor market condi-tions. Furthermore, strains in global finan-cial markets continue to pose significantdownside risks to the economic outlook.The Committee also anticipates that inflationover the medium term likely will run at orbelow its 2 percent objective.

To support a stronger economic recoveryand to help ensure that inflation, over time,

is at the rate most consistent with its dualmandate, the Committee will continue pur-chasing additional agency mortgage-backedsecurities at a pace of $40 billion per month.The Committee also will purchase longer-term Treasury securities after its program toextend the average maturity of its holdings ofTreasury securities is completed at the end ofthe year, initially at a pace of $45 billion permonth. The Committee is maintaining itsexisting policy of reinvesting principal pay-ments from its holdings of agency debt andagency mortgage-backed securities in agency

mortgage-backed securities and, in January,will resume rolling over maturing Treasurysecurities at auction. Taken together, theseactions should maintain downward pressureon longer-term interest rates, support mort-gage markets, and help to make broader fi-nancial conditions more accommodative.

The Committee will closely monitor incom-ing information on economic and financialdevelopments in coming months. If the out-look for the labor market does not improvesubstantially, the Committee will continue itspurchases of Treasury and agency mortgage-backed securities, and employ its other policytools as appropriate, until such improvementis achieved in a context of price stability. Indetermining the size, pace, and compositionof its asset purchases, the Committee will, asalways, take appropriate account of the likelyefficacy and costs of such purchases.



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To support continued progress toward max-imum employment and price stability, theCommittee expects that a highly accommo-dative stance of monetary policy will remainappropriate for a considerable time after theasset purchase program ends and the eco-

nomic recovery strengthens. In particular,the Committee decided to keep the targetrange for the federal funds rate at 0 to percent and currently anticipates that thisexceptionally low range for the federal fundsrate will be appropriate at least as long as theunemployment rate remains above 6 per-cent, inflation between one and two yearsahead is projected to be no more than a halfpercentage point above the Committees2 percent longer-run goal, and longer-terminflation expectations continue to be well an-

chored. The Committee views these thresh-olds as consistent with its earlier date-basedguidance. 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, Elizabeth Duke, Dennis P. Lockhart, Sandra

Pianalto, Jerome H. Powell, Sarah Bloom Raskin, Jere-my C. Stein, Daniel K. Tarullo, John C. Williams, andJanet L. Yellen.

Voting against this action: Jeffrey M. Lacker.

Mr. Lacker dissented because he objected to the asset

purchases and to the characterization of the conditionsunder which an exceptionally low range for the federalfunds rate would remain appropriate. He continued toview asset purchases as unlikely to add to economicgrowth without unacceptably increasing the risk of fu-ture inflation, and to see purchases of MBS as inappro-priate credit allocation. With regard to the funds rate,Mr. Lacker was concerned that linking the forwardguidance to a specific numerical level of the unem-ployment rate would inhibit the effectiveness of theCommittees communications and increase the poten-tial for inflationary policy errors; he preferred qualita-

tive guidance instead.It was agreed that the next meeting of the Committeewould be held on TuesdayWednesday, January 2930,2013. The meeting adjourned at 11:25 a.m. on Decem-ber 12, 2012.

Notation VoteBy notation vote completed on November 9, 2012, theCommittee unanimously approved the minutes of theFOMC meeting held on October 2324, 2012.

_____________________________William B. English

Secretary



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Summary of Economic Projections

In conjunction with the December 1112, 2012, Feder-al Open Market Committee (FOMC) meeting, meetingparticipantsthe 7 members of the Board of Gover-

nors and the 12 presidents of the Federal ReserveBanks, all of whom participate in the deliberations ofthe FOMCsubmitted their assessments of real out-put growth, the unemployment rate, inflation, and thetarget federal funds rate for each year from 2012through 2015 and over the longer run. Each partici-pants assessment was based on information availableat the time of the meeting plus his or her judgment ofappropriate monetary policy and assumptions about thefactors likely to affect economic outcomes. The long-er-run projections represent each participants judg-ment of the value to which each variable would be ex-pected to converge, over time, under appropriate mon-

etary policy and in the absence of further shocks to theeconomy. Appropriate monetary policy is defined asthe future path of policy that each participant deemsmost likely to foster outcomes for economic activityand inflation that best satisfy his or her individual in-terpretation of the Federal Reserves objectives of max-imum employment and stable prices.

Overall, the assessments submitted in December indi-cated that FOMC participants projected that, underappropriate monetary policy, the pace of economicrecovery would gradually pick up over the 201215

period and inflation would remain subdued (table 1 andfigure 1). Participants anticipated that the growth rateof real gross domestic product (GDP) would increase

somewhat in 2013 and again in 2014, and that econom-ic growth in 2014 and 2015 would exceed their esti-mates of the longer-run sustainable rate of growth,while the unemployment rate would decline graduallythrough 2015. Participants projected that each yearsinflation, as measured by the annual change in the priceindex for personal consumption expenditures (PCE),would run close to or below the FOMCs longer-runinflation objective of 2 percent.

As shown in figure 2, most participants judged thathighly accommodative monetary policy was likely to bewarranted over the next few years. In particular,

14 participants thought that it would be appropriate forthe first increase in the target federal funds rate to oc-cur during 2015 or later. Most participants judged thatappropriate monetary policy would include purchasingagency mortgage-backed securities (MBS) and longer-term Treasury securities after the completion of thematurity extension program at the end of 2012.

As in September, participants judged the uncertaintyassociated with the outlook for real activity and theunemployment rate to be unusually high comparedwith historical norms, with the risks weighted mainly

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, December 2012Percent

VariableCentral tendency1 Range2

2012 2013 2014 2015 Longer run 2012 2013 2014 2015 Longer run

Change in real GDP . . 1.7 to 1.8 2.3 to 3.0 3.0 to 3.5 3.0 to 3.7 2.3 to 2.5 1.6 to 2.0 2.0 to 3.2 2.8 to 4.0 2.5 to 4.2 2.2 to 3.0September projection . 1.7 to 2.0 2.5 to 3.0 3.0 to 3.8 3.0 to 3.8 2.3 to 2.5 1.6 to 2.0 2.3 to 3.5 2.7 to 4.1 2.5 to 4.2 2.2 to 3.0

Unemployment rate. . . 7.8 to 7.9 7.4 to 7.7 6.8 to 7.3 6.0 to 6.6 5.2 to 6.0 7.7 to 8.0 6.9 to 7.8 6.1 to 7.4 5.7 to 6.8 5.0 to 6.0September projection . 8.0 to 8.2 7.6 to 7.9 6.7 to 7.3 6.0 to 6.8 5.2 to 6.0 8.0 to 8.3 7.0 to 8.0 6.3 to 7.5 5.7 to 6.9 5.0 to 6.3

PCE inflation. . . . . . . . 1.6 to 1.7 1.3 to 2.0 1.5 to 2.0 1.7 to 2.0 2.0 1.6 to 1.8 1.3 to 2.0 1.4 to 2.2 1.5 to 2.2 2.0September projection . 1.7 to 1.8 1.6 to 2.0 1.6 to 2.0 1.8 to 2.0 2.0 1.5 to 1.9 1.5 to 2.1 1.6 to 2.2 1.8 to 2.3 2.0

Core PCE inflation3. . 1.6 to 1.7 1.6 to 1.9 1.6 to 2.0 1.8 to 2.0 1.6 to 1.8 1.5 to 2.0 1.5 to 2.0 1.7 to 2.2September projection . 1.7 to 1.9 1.7 to 2.0 1.8 to 2.0 1.9 to 2.0 1.6 to 2.0 1.6 to 2.0 1.6 to 2.2 1.8 to 2.3

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 September projections were made in conjunction with the meeting of the FederalOpen Market Committee on September 1213, 2012.

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, 201215 and over the longer run

Change in real GDP

Percent

3

2

1

0

1

2

3

4

5

-

+

2007 2008 2009 2010 2011 2012 2013 2014 2015 Longerrun

Central tendency of projections

Range of projections

Actual

Unemployment rate

Percent

5

6

7

8

9

10

2007 2008 2009 2010 2011 2012 2013 2014 2015 Longerrun

PCE inflation

Percent

1

2

3

2007 2008 2009 2010 2011 2012 2013 2014 2015 Longerrun

Core PCE inflation

Percent

1

2

3

2007 2008 2009 2010 2011 2012 2013 2014 2015 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, December 2012

2

3

13

1

Appropriate timing of policy firming

Number of participants

1

2

3

4

5

6

7

8

9

10

11

12

13

2013 2014 2015 2016

Appropriate pace of policy firming Percent

Target federal funds rate at year-end

0

1

2

3

4

5

6

2012 2013 2014 2015 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 September 2012, the numbers of FOMC participants who judged that thefirst increase in the target federal funds rate would occur in 2012, 2013, 2014, 2015, and 2016 were, respectively, 1, 3,2, 12, and 1. In the lower panel, each shaded circle indicates the value (rounded to the nearest 1/4 percentage point) ofan individual participants judgment of the appropriate level of the target federal funds rate at the end of the specifiedcalendar year or over the longer run.

Summary of Economic Projections of the Meeting of December 1112, 2012 Page 3_____________________________________________________________________________________________


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toward slower economic growth and a higher unem-ployment rate. While a number of participants viewedthe uncertainty surrounding their projections for infla-tion to be unusually high, more saw the level of uncer-tainty to be broadly similar to historical norms; mostconsidered the risks to inflation to be roughly balanced.

The Outlook for Economic ActivityParticipants judged that the economy grew at a moder-ate pace over the second half of 2012 and projectedthat, conditional on their individual assumptions aboutappropriate monetary policy, the economy would growat a somewhat faster pace in 2013 before expanding in2014 and 2015 at a rate above what participants saw asthe longer-run rate of output growth. The central ten-dency of their projections for the change in real GDPin 2012 was 1.7 to 1.8 percent, slightly lower than inSeptember. A number of participants mentioned thatlast summers drought and the effects of Hurricane

Sandy likely had held down economic activity in thesecond half of this year. Many participants also notedthat, while conditions in the housing and labor marketsappeared to have improved recently, uncertainty aboutfiscal policy appeared to be holding back business andhousehold spending. Participants projections for 2013through 2015 were generally little changed relative totheir September projections. The central tendency ofparticipants projections for real GDP growth in 2013was 2.3 to 3.0 percent, followed by a central tendencyof 3.0 to 3.5 percent for 2014 and one of 3.0 to3.7 percent for 2015. The central tendency for the

longer-run rate of increase of real GDP remained 2.3 to2.5 percent, unchanged from September. Most partici-pants noted that the high degree of monetary policyaccommodation assumed in their projections wouldhelp promote the economic recovery over the forecastperiod; however, they also judged that several factorswould likely hold back the pace of economic expan-sion, including slower growth abroad, a still-weak hous-ing market, the difficult fiscal and financial situation inEurope, and fiscal restraint in the United States.

Participants projected the unemployment rate for thefinal quarter of 2012 to be close to its average level in

October and November, implying a rate somewhatbelow that projected in September. Participants antici-pated a gradual decline in the unemployment rate overthe forecast period; even so, they generally thought thatthe unemployment rate at the end of 2015 would stillbe well above their individual estimates of its longer-run normal level. The central tendencies of partici-pants forecasts for the unemployment rate were 7.4 to7.7 percent at the end of 2013, 6.8 to 7.3 percent at the

end of 2014, and 6.0 to 6.6 percent at the end of 2015.The central 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 to6.0 percent, unchanged from September. Most partici-

pants projected that the unemployment rate wouldconverge to their estimates of its longer-run normalrate in five or six years, while a few judged that lesstime would be needed.

Figures 3.A and 3.B provide details on the diversity ofparticipants views regarding the likely outcomes forreal GDP growth and the unemployment rate over thenext three years and over the longer run. The disper-sion in these projections reflects differences in partici-pants assessments of many factors, including appropri-ate monetary policy and its effects on the economy, therate of improvement in the housing sector, the spillover

effects of the fiscal and financial situation in Europe,the prospective path for U.S. fiscal policy, the extent ofstructural dislocations in the labor market, the likelyevolution of credit and financial market conditions, andlonger-term trends in productivity and the labor force.With the data for much of 2012 now in hand, the dis-persion of participants projections of real GDP growthand the unemployment rate this year narrowed com-pared with their September submissions. Meanwhile,the distribution of participants forecasts for the changein real GDP in 2013 shifted down a bit, and that for2014 narrowed slightly. However, the range of projec-

tions for real GDP growth in 2015 was little changedfrom September. The distributions of the unemploy-ment rate projections at the end of 2012, 2013, and2014 all shifted lower, while the range of projectionsfor the unemployment rate for 2015, at 5.7 to 6.8 per-cent, remained close to its September level. The dis-persion of estimates for the longer-run rate of outputgrowth stayed fairly narrow, with all but one between2.2 and 2.5 percent. The range of participants esti-mates of the longer-run rate of unemployment, at5.0 to 6.0 percent, narrowed relative to September.This range reflected different judgments among partic-ipants about several factors, including the outlook forlabor force participation and the structure of the labormarket.

The Outlook for InflationParticipants views on the broad outlook for inflationunder appropriate monetary policy were little changedfrom September. Most anticipated that inflation for2012 as a whole would be close to 1.6 percent, some-what lower than projected in September. A number of



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Figure 3.A. Distribution of participants projections for the change in real GDP, 201215 and over the longer run

2012


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1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2- - - - - - - - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3

Percent range

December projections

September projections

2013


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1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2- - - - - - - - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3

Percent range

2014


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1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2- - - - - - - - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3

Percent range

2015


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1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2- - - - - - - - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3

Percent range

Longer run


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1012

14161820

1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2- - - - - - - - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3

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, 201215 and over the longer run

2012


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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 7.6 7.8 8.0 8.2- - - - - - - - - - - - - - - - -

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 7.7 7.9 8.1 8.3

Percent range



2013


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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 7.6 7.8 8.0 8.2- - - - - - - - - - - - - - - - -

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 7.7 7.9 8.1 8.3

Percent range

2014


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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 7.6 7.8 8.0 8.2- - - - - - - - - - - - - - - - -

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 7.7 7.9 8.1 8.3

Percent range

2015


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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 7.6 7.8 8.0 8.2- - - - - - - - - - - - - - - - -

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 7.7 7.9 8.1 8.3

Percent range

Longer run


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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 7.6 7.8 8.0 8.2- - - - - - - - - - - - - - - - -

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 7.7 7.9 8.1 8.3

Percent range




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participants remarked that recent inflation readings hadcome in below their expectations. Almost all of theparticipants judged that both headline and core infla-tion would remain subdued over the 201315 period,running at rates equal to or below the FOMCs longer-run objective of 2 percent. Specifically, the central ten-

dency of participants projections for inflation, asmeasured by the PCE price index, moved down to1.3 to 2.0 percent for 2013 and was little changed for2014 and 2015 at 1.5 to 2.0 percent and 1.7 to 2.0 per-cent, respectively. The central tendencies of the fore-casts for core inflation were broadly similar to those forthe headline measure for 2013 through 2015. In dis-cussing factors likely to sustain low inflation, severalparticipants cited stable inflation expectations and ex-pectations for continued sizable resource slack.

Figures 3.C and 3.D provide information about thediversity of participants views about the outlook for

inflation. The range of participants projections forheadline inflation for 2012 narrowed from 1.5 to1.9 percent in September to 1.6 to 1.8 percent in De-cember; nearly all participants projections in Decemberwere at 1.6 percent or 1.7 percent, broadly in line withrecent inflation readings. The distributions of partici-pants projections for headline inflation in 2013 and2014 shifted lower compared with the correspondingdistributions for September, while the range of projec-tions for core inflation narrowed slightly for both years.The distributions for core and overall inflation in 2015were concentrated near the Committees longer-run

inflation objective of 2 percent, although somewhat lessso than in September.

Appropriate Monetary PolicyAs indicated in figure 2, most participants judged thatexceptionally low levels of the federal funds rate wouldremain appropriate for several more years. In particu-lar, 13 participants thought that the first increase in thetarget federal funds rate would not be warranted until2015, and 1 judged that policy firming would likely notbe appropriate until 2016 (upper panel). The 13 partic-ipants who expected that the target federal funds ratewould not move above its effective lower bound until

2015 thought the federal funds rate would be 1 per-cent or lower at the end of that year, while the 1 partic-ipant who expected that policy firming would com-mence in 2016 saw the federal funds rate target at50 basis points at the end of that year. Five partici-pants judged that an earlier increase in the federal fundsrate, in 2013 or 2014, would be most consistent withthe Committees statutory mandate. Those participantsjudged that the appropriate value for the federal funds

rate would range from to 2 percent at the end of2014 and from 2 to 4 percent at the end of 2015.

Among the participants who saw a later tightening ofpolicy, a majority indicated that they believed it wasappropriate to maintain the current level of the federalfunds rate until the unemployment rate is less than orequal to 6 percent. In contrast, a majority of thosewho favored an earlier tightening of policy pointed toconcerns about inflation as a primary reason for ex-pecting that it would be appropriate to tighten policysooner. Participants were about evenly split betweenthose who judged the appropriate path for the federalfunds rate to be unchanged relative to September andthose who saw the appropriate path as lower.

Nearly all participants saw the appropriate target forthe federal funds rate at the end of 2015 as still wellbelow its expected longer-run value. Estimates of the

longer-run target federal funds rate ranged from 3 to4 percent, reflecting the Committees inflation objec-tive of 2 percent and participants judgments about thelonger-run equilibrium level of the real federal fundsrate.

Participants also provided information on their viewsregarding the appropriate path of the Federal Reservesbalance sheet. Most participants thought it was appro-priate for the Committee to continue purchasing MBSand longer-term Treasury securities after completingthe maturity extension program at the end of this year.In their projections, taking into account the likely bene-

fits and costs of purchases as well as the expected evo-lution of the outlook, these participants were approxi-mately evenly divided between those who judged that itwould likely be appropriate for the Committee to com-plete its asset purchases sometime around the middleof 2013 and those who judged that it would likely beappropriate for the asset purchases to continue beyondthat date. In contrast, several participants believed theCommittee would best foster its dual objectives by end-ing its purchases of Treasury securities or all of its assetpurchases at the end of this year when the maturityextension program was completed.

Key factors informing participants views of the eco-nomic outlook and the appropriate setting for mone-tary policy include their judgments regarding labormarket conditions that would be consistent with maxi-mum employment, the extent to which employmentcurrently deviated from maximum employment, theextent to which projected inflation over the mediumterm deviated from the Committees longer-term objec-tive of 2 percent, and participants projections of the



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Figure 3.C. Distribution of participants projections for PCE inflation, 201215 and over the longer run

2012


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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range



2013


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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2014


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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2015


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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

Longer run


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1012

14161820

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

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, 201215

2012


2

4

6

8

1012

14

16

18

20

1.5 1.7 1.9 2.1 2.3- - - - -

1.6 1.8 2.0 2.2 2.4

Percent range

December projectionsSeptember projections

2013


2

4

6

8

10

12

14

16

18

20

1.5 1.7 1.9 2.1 2.3- - - - -

1.6 1.8 2.0 2.2 2.4

Percent range

2014


2

4

6

810

12

14

16

18

20

1.5 1.7 1.9 2.1 2.3- - - - -

1.6 1.8 2.0 2.2 2.4

Percent range

2015


2

4

68

10

12

14

16

18

20

1.5 1.7 1.9 2.1 2.3- - - - -

1.6 1.8 2.0 2.2 2.4

Percent range




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likely time horizon necessary to return employment andinflation to mandate-consistent levels. Many partici-pants mentioned economic thresholds based on theunemployment rate and the inflation outlook that wereconsistent with their judgments of when it would beappropriate to consider beginning to raise the federal

funds rate. A couple of participants noted that theirassessments of the appropriate path for the federalfunds rate took into account the likelihood that theneutral level of the federal funds rate was somewhatbelow its historical norm. There was some concernexpressed that a protracted period of very accommoda-tive monetary policy could lead to imbalances in thefinancial system. It was also noted that because theappropriate stance of monetary policy is conditional onthe evolution of real activity and inflation over time,assessments of the appropriate future path of the fed-eral funds rate and the balance sheet could change if

economic conditions were to evolve in an unexpectedmanner.

Figure 3.E details the distribution of participantsjudgments regarding the appropriate level of the targetfederal funds rate at the end of each calendar year from2012 to 2015 and over the longer run. As previouslynoted, most participants judged that economic condi-tions would warrant maintaining the current low levelof the federal funds rate until 2015. Views on the ap-propriate level of the federal funds rate by the end of2015 varied, with 12 participants seeing the appropriatelevel of the federal funds rate as 1 percent or lower and

4 of them seeing the appropriate level as 2 percent orhigher. Generally, the participants who judged that alonger period of very accommodative monetary policywould be appropriate were those who projected that asizable gap between the unemployment rate and thelonger-run normal level of the unemployment ratewould persist until 2015 or later. In contrast, the ma-jority of the 5 participants who judged that policy firm-ing should begin in 2013 or 2014 indicated that theCommittee would need to act relatively soon in orderto keep inflation near the FOMCs longer-run objectiveof 2 percent and to prevent a rise in inflation expecta-tions.

Uncertainty and RisksNearly all of the participants judged their current levelsof uncertainty about real GDP growth and unemploy-ment to be higher thanwas the norm during the previ-

ous 20 years (figure 4).1 Seven participants judged thatthe levels of uncertainty associated with their forecastsof total PCE inflation were higher as well, while anoth-er 10 participants viewed uncertainty about inflation asbroadly similar to historical norms. The main factorscited as contributing to the elevated uncertainty abouteconomic outcomes were the difficulties involved inpredicting fiscal policy in the United States, the contin-uing potential for European developments to threatenfinancial stability, and the possibility of a general slow-down in global economic growth. As in September,

participants noted the challenges associated with fore-casting the path of the U.S. economic recovery follow-ing a financial crisis and recession that differed marked-ly from recent historical experience. A number of par-ticipants also commented that in the aftermath of thefinancial crisis, they were more uncertain about the lev-el of potential output and its rate of growth. It wasnoted that some of the uncertainty about potential out-put arose from the risk that a continuation of elevatedlevels of long-term unemployment might impair theskills of the affected individuals or cause some of themto drop out of the labor force, thereby reducing poten-tial output in the medium term.

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 1992 through2011. 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.

Table 2. Average historical projection error rangesPercentage points

Variable 2012 2013 2014 2015

Change in real GDP1 . . . . . 0.6 1.4 1.7 1.7

Unemployment rate1 . . . . . 0.2 0.9 1.5 1.9

Total consumer prices2 . . . . 0.5 0.9 1.1 1.0

NOTE: Error ranges shown are measured as plus or minus theroot mean squared error of projections for 1992 through 2011 that

were 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 theprevious year to the fourth quarter of the year indicated.



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Figure 3.E. Distribution of participants projections for the target federal funds rate, 201215 and over the longer run

2012


2468

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



2013


2468

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

2014


2468

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


2468

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


2468

101214

161820

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



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



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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A majority of participants reported that they saw therisks to their forecasts of real GDP growth as weightedtoward the downside and, accordingly, the risks to theirprojections of the unemployment rate as tilted to theupside. The most frequently identified sources of riskwere U.S. fiscal policy, which many participants

thought had the potential to slow economic activitysignificantly over the near term, and the situation inEurope.

Most participants continued to judge the risks to theirprojections for inflation as broadly balanced, with sev-eral highlighting the recent stability of longer-term in

flation expectations. However, three participants sawthe risks to inflation as tilted to the downside, reflect-ing, for example, risks of disinflation that could arisefrom adverse shocks to the economy that policy wouldhave limited scope to offset. A couple of participantssaw the risks to inflation as weighted to the upside in

light of concerns about U.S. fiscal imbalances, the cur-rent highly accommodative stance of monetary policy,and uncertainty about the Committees ability to shiftto a less accommodative policy stance when it becomesappropriate to do so.



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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 summarizes the average historicalaccuracy of a range of forecasts, includingthose reported in past Monetary Policy Reports

and those prepared by the Federal ReserveBoards staff in advance of meetings of theFederal Open Market Committee. The pro-jection error ranges shown in the table il-lustrate the considerable uncertainty associat-ed with economic forecasts. For example,suppose a participant projects that real grossdomestic product (GDP) and total consumerprices will rise steadily at annual rates of, re-spectively, 3 percent and 2 percent. If theuncertainty attending those projections is simi-lar to that experienced in the past and the risks

around the projections are broadly balanced,the numbers reported in table 2 would imply aprobability of about 70 percent that actualGDP would expand within a range of 2.4 to3.6 percent in the current year, 1.6 to 4.4 per-

cent in the second year, and 1.3 to 4.7 percentin the third and fourth years. The correspond-ing 70 percent confidence intervals for overallinflation would be 1.5 to 2.5 percent in the cur-rent year, 1.1 to 2.9 percent in the second year,0.9 to 3.1 percent in the third year, and 1.0 to3.0 percent in the fourth year.

Because current conditions may differfrom those that prevailed, on average, over his-tory, participants provide judgments as to

whether the uncertainty attached to their pro-jections of each variable is greater than, smallerthan, or broadly similar to typical levels offorecast uncertainty in the past, as shown intable 2. Participants also provide judgments asto whether the risks to their projections areweighted to the upside, are weighted to thedownside, or are broadly balanced. That is,participants judge whether each variable ismore likely to be above or below their projec-tions of the most likely outcome. These judg-ments about the uncertainty and the risks at-tending each participants projections are dis-

tinct from the diversity of participants viewsabout the most likely outcomes. Forecast un-certainty is concerned with the risks associatedwith a particular projection rather than withdivergences across a number of different pro-jections.

As with real activity and inflation, the out-look for the future path of the federal fundsrate is subject to considerable uncertainty. Thisuncertainty arises primarily because each partic-ipants assessment of the appropriate stance ofmonetary policy depends importantly on the

evolution of real activity and inflation overtime. If economic conditions evolve in an un-expected manner, then assessments of the ap-propriate setting of the federal funds ratewould change from that point forward.


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