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Minutes of the Federal Open Market CommitteeMarch 1920, 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, March 19, 2013, at 10:00 a.m., and continued onWednesday, March 20, 2013, at 9:00 a.m.

PRESENT:Ben Bernanke, ChairmanWilliam C. Dudley, Vice ChairmanJames BullardElizabeth DukeCharles L. EvansEsther L. GeorgeJerome H. PowellSarah Bloom Raskin

Eric RosengrenJeremy C. SteinDaniel K. TarulloJanet L. Yellen

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

Jeffrey M. Lacker, Dennis P. Lockhart, and John C.Williams, Presidents of the Federal Reserve

Banks of Richmond, Atlanta, and San Francis-co, respectively

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

Thomas A. Connors, Troy Davig, Michael P.Leahy, Stephen A. Meyer, David Reifschnei-der, Christopher J. Waller, and WilliamWascher, Associate Economists

Simon Potter, Manager, System Open Market Ac-count

Michael S. Gibson, Director, Division of BankingSupervision and Regulation, Board of Gover-

nors

Nellie Liang, Director, Office of Financial StabilityPolicy and Research, Board of Governors

James A. Clouse and William Nelson, Deputy Di-rectors, Division of Monetary Affairs, Board ofGovernors

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

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Seth B. Carpenter, Senior Associate Director, Divi-sion of Monetary Affairs, Board of Governors

Ellen M. Meade, Senior Adviser, Division of Mon-etary Affairs, Board of Governors

Eric M. Engen, Thomas Laubach, David E. Le-bow, and Michael G. Palumbo, Associate Di-rectors, Division of Research and Statistics,Board of Governors

William F. Bassett, Deputy Associate Director, Di-vision of Monetary Affairs, Board of Gover-nors

Stacey Tevlin, Assistant Director, Division of Re-search and Statistics, Board of Governors; MinWei, Assistant Director, Division of MonetaryAffairs, Board of Governors

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

David H. Small, Project Manager, Division ofMonetary Affairs, Board of Governors

Gregory L. Stefani, First Vice President, FederalReserve Bank of Cleveland

David Altig, Loretta J. Mester, Glenn D. Rude-busch, and Mark S. Sniderman, Executive Vice

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Presidents, Federal Reserve Banks of Atlanta,Philadelphia, San Francisco, and Cleveland, re-spectively

Spencer Krane, Lorie K. Logan, Kevin Stiroh, andKei-Mu Yi, Senior Vice Presidents, Federal Re-

serve Banks of Chicago, New York, NewYork, and Minneapolis, respectively

Evan F. Koenig, Jonathan P. McCarthy, GiovanniOlivei, and Julie Ann Remache, Vice Presi-dents, Federal Reserve Banks of Dallas, NewYork, Boston, and New York, respectively

Robert L. Hetzel, Senior Economist, Federal Re-serve Bank of Richmond

_______________________ Attended Tuesdays session only.

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 January 2930, 2013.The Manager also reported on developments in foreignmoney markets and implications for the assets that theFederal Reserve holds in its foreign currency portfolio.

By unanimous vote, the Committee ratified the OpenMarket Desks domestic transactions over the inter-meeting period. There were no intervention operationsin foreign currencies for the Systems account over theintermeeting period.

Staff Review of the Economic SituationThe information reviewed at the March 1920 meetingsuggested that economic activity was expanding at amoderate rate in the first quarter of this year after theslowdown late last year. Private-sector employmentincreased at a fairly solid pace, on balance, and the un-employment rate, though still elevated, was slightlylower in February than in the fourth quarter of lastyear. Consumer price inflation, excluding some tempo-rary fluctuations in energy prices, was subdued, whilemeasures of longer-run inflation expectations remainedstable.

Private nonfarm employment increased at a modestrate in January but expanded more briskly in February,while government employment continued to decrease.

The unemployment rate was 7.7 percent in February,slightly less than its fourth-quarter average; the laborforce participation rate was also a bit below its fourth-quarter average. The rate of long-duration unemploy-ment and the share of workers employed part time foreconomic reasons were little changed, on net, and both

measures remained high. Initial claims for unemploy-ment insurance trended down somewhat over the in-termeeting period. The rate of private-sector hiring,along with indicators of job openings and firms hiringplans, were generally subdued and were consistent withcontinued moderate increases in employment in thecoming months.

Manufacturing production increased strongly in Febru-ary after declining in January, and the rate of manufac-turing capacity utilization in February was a little higherthan in the fourth quarter. The production of motorvehicles and parts rose considerably in February, and

there were also widespread increases in factory outputin other sectors. Automakers schedules, however, in-dicated that the pace of motor vehicle assemblies in thecoming months would be a bit below that in February.Broader indicators of manufacturing production, suchas the diffusion indexes of new orders from the nation-al and regional manufacturing surveys, were at levelsthat pointed to moderate increases in factory produc-tion in the near term.

Real personal consumption expenditures rose modestlyin January. In February, nominal retail sales, excludingthose at motor vehicle and parts outlets, increased at a

strong rate, while light motor vehicle sales edged up.Some key factors that tend to influence householdspending were mixed: Households real disposableincomes declined in January, reflecting in part the in-creases in both payroll and income taxes that went intoeffect at the beginning of the year and the previouspulling forward of taxable income from 2013 into 2012;in contrast, household net worth likely rose in recentmonths as a result of higher equity values and homeprices. Consumer sentiment in the Thomson Reu-ters/University of Michigan Surveys of Consumersrose somewhat in February, but it declined in early

March and remained relatively downbeat.Conditions in the housing sector improved further, butconstruction activity was still at a relatively low leveland continued to be restrained by tight credit standardsfor mortgages. Both starts and permits of new single-family homes increased, on net, over January and Feb-ruary. Starts of multifamily units declined, on balance,but permits rose, consistent with additional gains in

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construction in coming months. Sales of both new andexisting homes advanced in January, and home pricesincreased further.

Real business expenditures on equipment and softwareappeared to slow somewhat early this year after risingat a brisk rate in the fourth quarter. Nominal ship-ments for nondefense capital goods excluding aircraftdecreased in January, but nominal orders increased to alevel above that of shipments, pointing to higher ship-ments in the near term. Other forward-looking indica-tors, such as surveys of business conditions and capitalspending plans, also suggested that outlays for businessequipment would rise in the coming months. Nominalbusiness spending for nonresidential construction de-clined in January. Business inventories in most indus-tries appeared to be generally aligned with sales in re-cent months.

Real federal government purchases appeared to de-crease further in January and February, as defensespending continued to contract on balance. Real stateand local government purchases looked to have de-clined as nonfederal government payrolls decreased inJanuary and February and nominal construction ex-penditures fell in January.

The U.S. international trade deficit narrowed in De-cember but widened in January. Imports rose in Janu-ary, largely reflecting a rebound in the value of oil im-ports, and exports decreased, driven by a decline in thevalue of exports of petroleum products. Exports of

capital goods increased; the other major categories ofexports remained about unchanged.

Indexes of overall U.S. consumer prices were littlechanged in January but the consumer price indexmoved up briskly in February, largely reflecting a sharprise in gasoline prices. Consumer food prices were flatin January and only edged up in February. Consumerprices excluding food and energy increased moderatelyin January and February. Near-term inflation expecta-tions from the Michigan survey were unchanged inFebruary and early March; longer-term inflation expec-tations in the survey were also little changed and re-

mained within the narrow range that they have occu-pied for some time.

Measures of labor compensation indicated that gains innominal wages remained relatively slow, only slightlyabove the rate of price inflation. Compensation perhour in the nonfarm business sector rose modestlyover 2012, and, with small increases in productivity,unit labor costs also advanced only modestly. Gains in

the employment cost index were even slower than forthe measure of compensation per hour last year. InJanuary and February, increases in average hourly earn-ings for all employees continued to be subdued.

Economic growth weakened in a number of the ad-vanced foreign economies in the fourth quarter of2012. In the euro area, real gross domestic product(GDP) contracted for a fifth consecutive quarter. Re-cent data for European economies, including retailsales and purchasing managers indexes, suggest that therate of economic contraction may have diminishedsince the beginning of the year. In emerging marketeconomies (EMEs), an increase in exports contributedto a pickup in the pace of economic growth in thefourth quarter, including for China. More-recent indi-cators suggest that economic activity in China hasslowed some. Inflation remained generally contained inboth advanced foreign economies and EMEs.

Staff Review of the Financial SituationGenerally favorable U.S. economic data releases, alongwith communications from Federal Reserve policymak-ers regarding the outlook for the economy and mone-tary policy, appeared to contribute to improved senti-ment in domestic financial markets over the intermeet-ing period despite some renewed concerns about eco-nomic and financial conditions in Europe.

The expected path for the federal funds rate implied bymarket quotes moved down over the intermeeting pe-riod, likely reflecting policymakers communications

that reinforced market expectations of continued mon-etary policy accommodation. Results from the Deskssurvey of primary dealers conducted prior to the Marchmeeting showed that dealers continued to view thethird quarter of 2015 as the most likely time of the firstincrease in the target federal funds rate. In addition,the median dealer continued to see the first quarter of2014 as the most probable time for the Federal Re-serves asset purchases to end, and most dealers antici-pated that the pace of purchases would be adjusteddown before ending.

Yields on nominal Treasury securities were modestly

lower, on net, over the intermeeting period. In lateFebruary, these yields declined notably following theinconclusive election outcomes in Italy but mostly re-traced this decline as economic data releases in subse-quent weeks exceeded expectations. Measures of infla-tion compensation derived from nominal and inflation-protected Treasury securities edged down over the pe-riod.

Minutes of the Meeting of March 1920, 2013 Page 3_____________________________________________________________________________________________


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central banks cut interest rates, citing concerns abouteconomic growth.

The staff also reported on potential risks to financialstability, including those associated with the currentlow interest rate environment. Some observers havesuggested that a lengthy period of low long-term ratescould encourage excessive risk-taking that could haveadverse consequences for financial stability at somepoint in the future. The staff surveyed a wide range ofasset markets and financial institutions for signs of ex-cess valuations, leverage, or risk-taking that could posesystemic risks. Low interest rates likely have supportedgains in asset prices and encouraged the flow of creditto households and businesses, but these changes todate do not appear to have been accompanied by sig-nificant financial imbalances. However, trends in a fewspecific markets bore watching, and the staff will con-tinue to monitor for signs of developments that could

pose risks to financial stability.

Staff Economic OutlookIn the economic forecast prepared by the staff for theMarch FOMC meeting, real GDP growth was reviseddown somewhat in the near term, largely reflecting thefederal spending sequestration that went into effect onMarch 1 and the resulting drag from reduced govern-ment purchases. The staffs medium-term forecast forreal GDP growth was little changed, on balance, as theeffects of somewhat more fiscal policy restraint and ahigher assumed path for the foreign exchange value ofthe dollar were essentially offset by a brighter outlook

for domestic energy production and a higher projectionfor household wealth, which reflected upward revisionsto the projected paths for both equity prices and homeprices. On balance, with fiscal policy expected to betighter in 2013 than in 2012, the staff expected thatincreases in real GDP this year would only modestlyexceed the growth rate of potential output. Fiscal poli-cy restraint on economic growth was assumed to easeover time, and real GDP was projected to accelerategradually in 2014 and 2015, supported by increases inconsumer and business sentiment, further improve-ments in credit availability and financial conditions, and

accommodative monetary policy. The expansion ineconomic activity was anticipated to slowly reduce theslack in labor and product markets over the projectionperiod, and progress in reducing the unemploymentrate was expected to be gradual.

The staffs forecast for inflation was little changed fromthe projection prepared for the January FOMC meet-ing. With crude oil prices anticipated to trend down

slowly from their current levels, long-run inflation ex-pectations assumed to remain stable, and significantresource slack persisting over the forecast period, thestaff continued to project that inflation would be sub-dued through 2015.

The staff viewed the uncertainty around its forecast foreconomic activity as similar to the average level overthe past 20 years. However, the risks were viewed asskewed to the downside, reflecting in part the concernsabout the situation in Europe and the possibility of amore severe tightening in U.S. fiscal policy than cur-rently anticipated. The staff saw the uncertainty aroundits projection for inflation as about average, and itviewed the risks to the inflation outlook as roughly bal-anced.

Participants Views on Current Conditions andEconomic Outlook

In 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 2013 through2015 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.

Meeting participants generally indicated that theyviewed the economic data received during the inter-meeting period as somewhat more positive than hadbeen expected, but that fiscal policy appeared to havebecome more restrictive, leaving the outlook for theeconomy little changed on balance since the Januarymeeting. Participants judged that the economy hadreturned to moderate growth following a pause late lastyear, and a few noted that the downside risks may havediminished. Conditions in labor markets had shownsigns of improvement, although the unemploymentrate remained elevated. Spending by households andbusinesses was continuing to expand, perhaps reflect-ing some increased optimism. Participants noted thatthe housing market, in particular, had firmed somewhatfurther. Accommodative monetary policy was likelyproviding important support to these developments.



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In contrast, participants thought that fiscal policy wasexerting significant near-term restraint on the economy.Participants generally anticipated that growth wouldproceed at a moderate pace and that the unemploymentrate would decline gradually toward levels consistentwith the Committees mandate. Inflation had been

running below the Committees 2 percent objective forsome time, and nearly all of the participants anticipatedthat it would run at or below 2 percent over the medi-um term.

In their discussion of the household sector, most par-ticipants noted that the data on spending were some-what encouraging, particularly with regard to spendingon automobiles, other consumer durables, and housing.Several participants stated that the moderate accelera-tion in spending might in part reflect pent-up demandfollowing years of deleveraging and was importantlysupported by the stance of monetary policy, which has

reduced the cost of financing purchases and improvedcredit availability to some degree. A couple of partici-pants noted that the increase in the payroll tax ap-peared to have not yet had a material effect on house-hold spending; however, another suggested that thepayroll tax increase, along with higher gasoline prices,may be one reason why spending by lower-incomehouseholds appeared to be depressed, as those changesdisproportionately cut into the disposable income ofthose households. A couple of other participantsthought that overall consumer spending was likely stillheld back, at least in part, by ongoing concerns about

future income and employment prospects. Both fiscalrestraint and the high level of student debt were men-tioned as risks to aggregate household spending overthe forecast period.

Participants generally saw conditions in the housingmarket as having improved further over the intermeet-ing period. Rising house prices were strengtheninghousehold balance sheets by raising wealth and by in-creasing the ability of some homeowners to refinancetheir mortgages at lower rates. Such a dynamic wasseen as potentially leading to a virtuous cycle that couldhelp support household spending and financial market

conditions over time. Reports from homebuilders inmany parts of the country were encouraging. One par-ticipant pointed to ongoing changes in a range of fac-torsincluding demographics, credit conditions, busi-ness models, and consumer preferencesthat werelikely shifting both supply and demand in the housingsector and concluded that the outlook for the sectorwas quite uncertain and potentially subject to rapidchanges.

Many participants reported that their business contactswere seeing some further improvement in the econom-ic outlook. Firms reported increased planning for capi-tal expenditures, supported by low interest rates andsubstantial cash holdings. Investment spending onproductivity-enhancing technology was strong, as was

pipeline construction in the energy sector. A few par-ticipants indicated that their contacts saw the level ofuncertainty about the economic outlook as having de-clined recently, a development that could lead to in-creased investment expenditures.

Most participants remarked on the federal spendingsequester and its potential effects on the economy; theyjudged that recent tax and spending changes were al-ready restraining aggregate demand or would do soover the course of the year. A couple of participants,however, suggested that they had cut their estimates ofthe effect of recent federal austerity measures or had

never considered the effects to be substantial.

Recent readings on private employment and the unem-ployment rate indicated some improvement in labormarket conditions. Nonetheless, participants generallysaw the unemployment rate as still elevated and werenot yet confident that the recent progress toward theCommittees employment objective would be sus-tained. The need to use a range of indicators to gaugelabor market conditions was noted. One participanthighlighted that hiring rates and quit rates remainedsomewhat low. Another participant discussed evidencethat the labor market may have become less dynamic

over time, with the result that recent payroll gainsmight be more meaningful than would first appear.Inference about the labor force participation rate wascomplicated by its long-run downward trend. One par-ticipant cited research indicating that long-term unem-ployment, which is currently especially high, could leadto persistently lower income and wealth for those af-fected, even after they found jobs. More broadly, firmsreportedly remained cautious about hiring, which someparticipants attributed in part to restrictive fiscal policycombined with growing regulatory burden. This cau-tion appeared to have resulted in jobs remaining vacant

for substantially longer than would normally be thecase, given the unemployment rate.

Recent price developments were consistent with sub-dued inflation pressures and inflation remaining at orbelow the Committees 2 percent objective over themedium run. Participants saw little near-term inflation-ary pressure, with a few noting that the appreciation ofthe dollar was holding down import costs or that the



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recent increases in gasoline prices did not appear tohave passed through more broadly to prices of othergoods. Pointing to inflation that had been running be-low their objective for some time, some participantssaw downside risks to inflation, especially if economicactivity did not pick up as projected. But a few partici-

pants noted that the risk remained that inflationarypressures could rise as the expansion continued, espe-cially if monetary policy remained highly accommoda-tive for too long.

Participants discussed their assessments of risks to fi-nancial stability, particularly in light of the Committeeshighly accommodative stance of monetary policy.Many participants noted that in the current low-interestrate environment, investors in some financial marketswere taking on additional riskeither credit risk orinterest rate riskin an effort to boost returns. As aresult, vigilance on the part of policymakers and regula-

tors was warranted, especially in light of episodicstrains in European markets. A couple of participantsnoted that U.S. banks had expanded their capital posi-tions and were generally in sound financial condition.Meeting participants generally agreed that there was anongoing need to evaluate the possible interactions be-tween monetary policy decisions and financial stability,with some noting that adverse shocks to financial sta-bility can affect progress toward the Committees dualmandate.

Review of Efficacy and Costs of Asset PurchasesThe staff provided presentations covering the efficacy

of the Federal Reserves asset purchases, the effects ofthe purchases on security market functioning, the waysin which asset purchases might amplify or reduce risksto financial stability, and the fiscal implications of pur-chases. In their discussion of this topic, meeting partic-ipants generally judged the macroeconomic benefits ofthe current purchase program to outweigh the likelycosts and risks, but they agreed that an ongoing as-sessment of the benefits and costs was necessary.Pointing to academic and Federal Reserve staff re-search, most participants saw asset purchases as havinga meaningful effect in easing financial conditions and

so supporting economic growth. Some expressed theview that these effects had likely been stronger duringthe Federal Reserves initial large-scale asset purchasesbecause that program also helped support market func-tioning during the financial crisis. Other participants,however, saw little evidence that the efficacy of assetpurchases had declined over time, and a couple of thesesuggested that the effectiveness of purchases mighteven have increased more recently, as the easing of

credit constraints allowed more borrowers to take ad-vantage of lower interest rates. One participant em-phasized the role of recent asset purchases in keepinginflation from declining further below the Committeeslonger-run goal. A few participants felt that MBS pur-chases provided more support to the economy than

purchases of longer-term Treasury securities becausethey stimulated the housing sector directly; however, afew preferred to focus any purchases in the Treasurymarket to avoid allocating credit to a specific sector ofthe economy. It was noted that, in addition to thestandard channels through which monetary policy af-fects the economy, asset purchases could help signalthe Committees commitment to accommodative mon-etary policy, thereby making the forward guidanceabout the federal funds rate more effective. However,a few participants were not convinced of the benefitsof asset purchases, stating that the effects on financial

markets appeared to be short lived or that they sawlittle evidence of a significant macroeconomic effect.One participant suggested that the signaling effect ofasset purchases may have been reduced by the adoptionof threshold-based forward guidance. In general, re-flecting the limited experience with large-scale assetpurchases, participants recognized that estimates of theeconomic effects were necessarily imprecise and cov-ered a wide range.

Participants generally agreed that asset purchases alsohave potential costs and risks. In particular, partici-pants pointed to possible risks to the stability of the

financial system, the functioning of particular financialmarkets, the smooth withdrawal of monetary accom-modation when it eventually becomes appropriate, andthe Federal Reserves net income. Their views on thepractical importance of these risks varied, as did theirprescriptions for mitigating them. Asset purchaseswere seen by some as having a potential to contributeto imbalances in financial markets and asset prices,which could undermine financial stability over time.Moreover, to the extent that asset purchases pushdown longer-term interest rates, they potentially exposefinancial markets to a rapid rise in those rates in thefuture, which could impose significant losses on someinvestors and intermediaries. Several participants sug-gested that enhanced supervision could serve to limit,at least to some extent, the increased risk-taking associ-ated with a lengthy period of low long-term interestrates, and that effective policy communication or bal-ance sheet management by the Committee could re-duce the probability of excessively rapid increases inlonger-term rates. It was also noted that the accom-



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modative stance of policy could be supporting financialstability by returning the economy to a stable footingsooner than would otherwise be the case and perhapsby allowing borrowers to secure longer-term financingand thereby reduce funding risks; by contrast, curtailingasset purchases could slow the recovery and so extend

the period of very low interest rates. Nevertheless, anumber of participants remained concerned about thepotential for financial stability risks to build. One con-sequence of asset purchases has been the increase inthe Federal Reserves net income and its remittances tothe Treasury, but those values were projected to de-cline, perhaps even to zero for a time, as the Commit-tee eventually withdraws policy accommodation. Someparticipants were concerned that a substantial decline inremittances might lead to an adverse public reaction orpotentially undermine Federal Reserve credibility oreffectiveness. The possibility of such outcomes was

seen as necessitating clear communications about theoutlook for Federal Reserve net income. Several par-ticipants stated that such risks should not inhibit theCommittee from pursuing its mandated objectives forinflation and employment. In any case, it was indicatedthat the fiscal benefits of a stronger economy would bemuch greater than any short-term fluctuations in remit-tances, and moreover, a couple of participants notedthat cumulative remittances to the Treasury would like-ly be higher than would have been the case without anyasset purchases. Some participants also were con-cerned that additional asset purchases could complicatethe eventual firming of policyfor example, by impair-

ing the Committees control over the federal funds rate.A few participants raised the possibility of an undesira-ble rise in inflation. However, others expressed confi-dence in the Committees exit tools and its resolve tokeep inflation near its longer-run goal. Another exit-related concern was a possible adverse effect on marketfunctioning from MBS sales during the normalizationof the Federal Reserves balance sheet. Although theCommittees asset purchases have had little apparenteffect on securities market functioning to date, someparticipants felt that future asset sales could provemore challenging. In this regard, several participants

noted that a decision by the Committee to hold itsMBS to maturity instead of selling them would essen-tially eliminate this risk. A decision not to sell MBS, orto sell MBS only very slowly, would also mitigate someof the financial stability risks that could be associatedwith such sales as well as damp the decline in remit-tances to the Treasury at that time. Such a decision wasalso seen by some as a potential source of additionalnear-term policy accommodation. Overall, most meet-

ing participants thought the risks and costs of addition-al asset purchases remained manageable, but also thatcontinued close attention to these issues was warranted.A few participants noted that curtailing the purchaseprogram was the most direct way to mitigate the costsand risks.

In light of their discussion of the benefits and costs ofasset purchases, participants discussed their views onthe appropriate course for the current asset purchaseprogram. A few participants noted that they alreadyviewed the costs as likely outweighing the benefits andso would like to bring the program to a close relativelysoon. A few others saw the risks as increasing fairlyquickly with the size of the Federal Reserves balancesheet and judged that the pace of purchases would like-ly need to be reduced before long. Many participants,including some of those who were focused on the in-creasing risks, expressed the view that continued solid

improvement in the outlook for the labor market couldprompt the Committee to slow the pace of purchasesbeginning at some point over the next several meetings,while a few participants suggested that economic con-ditions would likely justify continuing the program atits current pace at least until late in the year. A range ofviews was expressed regarding the economic and labormarket conditions that would call for an adjustment inthe pace of purchases. Many participants emphasizedthat any decision to reduce the pace of purchasesshould reflect both an improvement in their overalloutlook for labor market conditions, as implied by a

wide range of available indicators, and their confidencein the sustainability of that improvement. A couple ofthese participants noted that if progress toward theCommittees economic goals were not maintained, thepace of purchases might appropriately be increased. Anumber of participants suggested that the Committeecould change the mix of its policy tools if necessary toincrease or maintain overall accommodation, includingpotentially adjusting its forward guidance or its balancesheet policies.

Committee Policy ActionCommittee members saw the information received

over the intermeeting period as suggesting that moder-ate economic growth had resumed following a pauselate last year. Labor market conditions had shownsigns of improvement, but the unemployment rate re-mained elevated. Household spending and businessfixed investment had advanced, and the housing sectorhad strengthened further, but fiscal policy had becomesomewhat more restrictive. The Committee expectedthat, with appropriate monetary policy accommodation,



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economic growth would proceed at a moderate paceand result in a gradual decline in the unemploymentrate toward levels that the Committee judges consistentwith its dual mandate. Members generally continued toanticipate that, with longer-term inflation expectationsstable and slack in resource utilization remaining, infla-

tion over the medium term would likely run at or belowthe Committees 2 percent objective.

In their discussion of monetary policy for the periodahead, members saw the economic outlook as littlechanged since the previous meeting, and, consequently,all but one member judged that a highly accommoda-tive stance of monetary policy was warranted in orderto foster a stronger economic recovery in a context ofprice stability. The Committee agreed that it would beappropriate to continue purchases of MBS at a pace of$40 billion per month and purchases of longer-termTreasury securities at a pace of $45 billion per month,

as well as to maintain the Committees reinvestmentpolicies. The Committee also retained its forwardguidance about the federal funds rate, including thethresholds on the unemployment and inflation rates.One member dissented from the Committees policydecision, expressing concern that the continued highlevel of monetary accommodation increased the risksof future economic and financial imbalances and, overtime, could cause an increase in inflation expectations.

Members stressed that any changes to the purchaseprogram should be conditional on continuing assess-ments both of labor market and inflation developments

and of the efficacy and costs of asset purchases. Inlight of the current review of benefits and costs, onemember judged that the pace of purchases should ide-ally be slowed immediately. A few members felt thatthe risks and costs of purchases, along with the im-proved outlook since last fall, would likely make a re-duction in the pace of purchases appropriate aroundmidyear, with purchases ending later this year. Severalothers thought that if the outlook for labor marketconditions improved as anticipated, it would probablybe appropriate to slow purchases later in the year andto stop them by year-end. Two members indicated that

purchases might well continue at the current pace atleast through the end of the year. It was also notedthat were the outlook to deteriorate, the pace of pur-chases could be increased. In light of this discussion,the Committee included language in the statement tobe released following the meeting in part to make ex-plicit that the size, pace, and composition of its assetpurchases were conditional not only on the likely effi-cacy and costs of those purchases, but also on the ex-

tent of progress toward the Committees economicobjectives.

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 seeksmonetary and financial conditions that willfoster maximum employment and price sta-bility. In particular, the Committee seeksconditions in reserve markets consistentwith federal funds trading in a range from0 to percent. The Committee directs theDesk to undertake open market operationsas necessary to maintain such conditions.

The Desk is directed to continue purchasinglonger-term Treasury securities at a pace ofabout $45 billion per month and to contin-ue purchasing agency mortgage-backed se-curities at a pace of about $40 billion permonth. The Committee also directs theDesk to engage in dollar roll and couponswap transactions as necessary to facilitatesettlement of the Federal Reserves agencymortgage-backed securities transactions.The Committee directs the Desk to main-tain its policy of rolling over maturingTreasury securities into new issues and its

policy of reinvesting principal payments onall agency debt and agency mortgage-backedsecurities in agency mortgage-backed securi-ties. The System Open Market AccountManager and the Secretary will keep theCommittee informed of ongoing develop-ments regarding the Systems balance sheetthat could affect the attainment over timeof the Committees objectives of maximumemployment and price stability.

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 Januarysuggests a return to moderate economicgrowth following a pause late last year. La-bor market conditions have shown signs ofimprovement in recent months but the un-employment rate remains elevated. House-hold spending and business fixed invest-



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ment advanced, and the housing sector hasstrengthened further, but fiscal policy hasbecome somewhat more restrictive. Infla-tion has been running somewhat below theCommittees longer-run objective, apartfrom temporary variations that largely re-

flect fluctuations in energy prices. Longer-term inflation expectations have remainedstable.

Consistent with its statutory mandate, theCommittee seeks to foster maximum em-ployment and price stability. The Commit-tee expects that, with appropriate policy ac-commodation, economic growth will pro-ceed at a moderate pace and the unem-ployment rate will gradually decline towardlevels the Committee judges consistent withits dual mandate. The Committee continues

to see downside risks to the economic out-look. The Committee also anticipates thatinflation over the medium term likely willrun at or below 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 decided to contin-ue purchasing additional agency mortgage-backed securities at a pace of $40 billion permonth and longer-term Treasury securitiesat a pace of $45 billion per month. The

Committee is maintaining its existing policyof reinvesting principal payments from itsholdings of agency debt and agencymortgage-backed securities in agencymortgage-backed securities and of rollingover maturing Treasury securities at auction.Taken together, these actions should main-tain downward pressure on longer-term in-terest rates, support mortgage markets, andhelp to make broader financial conditionsmore accommodative.

The Committee will closely monitor incom-ing information on economic and financialdevelopments in coming months. TheCommittee will continue its purchases ofTreasury and agency mortgage-backed secu-rities, and employ its other policy tools asappropriate, until the outlook for the labormarket has improved substantially in a con-text of price stability. In determining the

size, pace, and composition of its asset pur-chases, the Committee will continue to takeappropriate account of the likely efficacyand costs of such purchases as well as theextent of progress toward its economic ob-jectives.

To support continued progress towardmaximum employment and price stability,the Committee expects that a highly ac-commodative stance of monetary policy willremain appropriate for a considerable timeafter the asset purchase program ends andthe economic recovery strengthens. In par-ticular, the Committee decided to keep thetarget range for the federal funds rate at 0 to percent and currently anticipates that thisexceptionally low range for the federalfunds rate will be appropriate at least as

long as the unemployment rate remainsabove 6 percent, inflation between oneand two years ahead is projected to be nomore than a half percentage point above theCommittees 2 percent longer-run goal, andlonger-term inflation expectations continueto be well anchored. In determining howlong to maintain a highly accommodativestance of monetary policy, the Committeewill also consider other information, includ-ing additional measures of labor marketconditions, indicators of inflation pressures

and inflation expectations, and readings onfinancial developments. When the Com-mittee decides to begin to remove policyaccommodation, it will take a balanced ap-proach consistent with its longer-run goalsof maximum employment and inflation of2 percent.

Voting for this action: Ben Bernanke, William C.Dudley, James Bullard, Elizabeth Duke, Charles L. Ev-ans, Jerome H. Powell, Sarah Bloom Raskin, EricRosengren, Jeremy C. Stein, Daniel K. Tarullo, andJanet L. Yellen.

Voting against this action: Esther L. George.

Ms. George dissented because she continued to viewmonetary policy as too accommodative and thereforeas posing risks to the achievement of the Committeeseconomic objectives in the long run. In particular, thecurrent stance of policy could lead to financial imbal-ances, a mispricing of risk, and, over time, higher long-term inflation expectations. In her view, the Commit-



11/24

tees asset purchases were providing relatively smallbenefits, and, given the risks that they posed as well asthe improvement in the outlook for the labor market,she thought they should be wound down.

It was agreed that the next meeting of the Committeewould be held on TuesdayWednesday, April 30May1, 2013. The meeting adjourned at 11:30 a.m. onMarch 20, 2013.

Notation VoteBy notation vote completed on February 19, 2013, the

Committee unanimously approved the minutes of theFOMC meeting held on January 2930, 2013.

_____________________________William B. English

Secretary



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Summary of Economic Projections

In conjunction with the March 1920, 2013, FederalOpen 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 2013through 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. Thelonger-run projections represent each participantsjudgment of the value to which each variable would beexpected to converge, over time, under appropriate

monetary policy and in the absence of further shocksto the economy. Appropriate monetary policy isdefined as the future path of policy that each partici-pant deems most likely to foster outcomes for econom-ic activity and inflation that best satisfy his or her indi-vidual interpretation of the Federal Reserves objectivesof maximum employment and stable prices.

Overall, the assessments submitted in March indicatedthat FOMC participants projected that, under appro-priate monetary policy, the pace of economic recoverywould gradually pick up over the 201315 period andinflation would remain subdued (table 1 and figure 1).

Participants anticipated that the growth rate of realgross domestic product (GDP) would increase some-what over the forecast period to a pace that generally

exceeded their estimates of the longer-run sustainablerate of growth. Participants expected the unemploy-ment rate to decline gradually through 2015. Nearly allparticipants projected that inflation, as measured by theannual change in the price index for personal consump-tion expenditures (PCE), would remain somewhat be-low the longer-run goal in 2013 and then rise toward2 percent over the forecast period.

As shown in figure 2, most participants judged thathighly accommodative monetary policy was likely to bewarranted over the next few years to support stableprices and continued progress toward maximum em-

ployment. In particular, 14 participants thought that itwould be appropriate for the first increase in the targetfederal funds rate to occur during 2015 or later. Mostparticipants also judged that it would be appropriate tocontinue purchasing agency mortgage-backed securities(MBS) and longer-term Treasury securities into the sec-ond half of 2013.

Many participants continued to judge the uncertaintyassociated with the outlook for real activity and theunemployment rate to be unusually high comparedwith the norm of the past 20 years. In contrast to De-cember, however, more participants viewed the risks to

those outlooks as broadly balanced than saw the risksTable 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, March 2013Percent

VariableCentral tendency1 Range2

2013 2014 2015 Longer run 2013 2014 2015 Longer run

Change in real GDP . . . . . 2.3 to 2.8 2.9 to 3.4 2.9 to 3.7 2.3 to 2.5 2.0 to 3.0 2.6 to 3.8 2.5 to 3.8 2.0 to 3.0December projection . . 2.3 to 3.0 3.0 to 3.5 3.0 to 3.7 2.3 to 2.5 2.0 to 3.2 2.8 to 4.0 2.5 to 4.2 2.2 to 3.0

Unemployment rate . . . . . 7.3 to 7.5 6.7 to 7.0 6.0 to 6.5 5.2 to 6.0 6.9 to 7.6 6.1 to 7.1 5.7 to 6.5 5.0 to 6.0December projection . . 7.4 to 7.7 6.8 to 7.3 6.0 to 6.6 5.2 to 6.0 6.9 to 7.8 6.1 to 7.4 5.7 to 6.8 5.0 to 6.0

PCE inflation . . . . . . . . . . . 1.3 to 1.7 1.5 to 2.0 1.7 to 2.0 2.0 1.3 to 2.0 1.4 to 2.1 1.6 to 2.6 2.0December projection . . 1.3 to 2.0 1.5 to 2.0 1.7 to 2.0 2.0 1.3 to 2.0 1.4 to 2.2 1.5 to 2.2 2.0

Core PCE inflation3 . . . . . 1.5 to 1.6 1.7 to 2.0 1.8 to 2.1 1.5 to 2.0 1.5 to 2.1 1.7 to 2.6

December projection . . 1.6 to 1.9 1.6 to 2.0 1.8 to 2.0 1.5 to 2.0 1.5 to 2.0 1.7 to 2.2

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 indexfor personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the aver-age civilian unemployment rate in the fourth quarter of the year indicated. Each participants projections are based on his or her assessment of appropriatemonetary policy. Longer-run projections represent each participants assessment of the rate to which each variable would be expected to converge under ap-propriate monetary policy and in the absence of further shocks to the economy. The December projections were made in conjunction with the meeting of theFederal Open Market Committee on December 1112, 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, 201315 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 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 Longerrun

PCE inflation

Percent

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015 Longerrun

Core PCE inflation

Percent

1

2

3

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 are

annual.

Page 2 _Federal Open Market Committee


14/24

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

1

4

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

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 December 2012, the numbers of FOMC participants who judged that thefirst increase in the target federal funds rate would occur in 2013, 2014, 2015, and 2016 were, respectively, 2, 3, 13,and 1. In the lower panel, each shaded circle indicates the value (rounded to the nearest 1/4 percentage point) of anindividual 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 March 1920, 2013 Page 3


15/24

as skewed toward adverse outcomes. A majority ofparticipants indicated that the uncertainty surroundingtheir projections for PCE inflation was broadly similarto historical norms, and nearly all considered the risksto inflation to be either broadly balanced or weightedto the downside.

The Outlook for Economic ActivityParticipants projected that, conditional on their indi-vidual assumptions about appropriate monetary policy,the economy would grow at a somewhat faster pace in2013 than it had in 2012. They also generally judgedthat growth would strengthen further in 2014 and 2015,in most cases to a rate above what participants saw asthe longer-run rate of output growth. Most partici-pants noted that the high degree of monetary policyaccommodation assumed in their projections wouldhelp promote the economic recovery over the forecastperiod and expected that continued improvement in

the housing sector would add more broadly to privatedemand; however, they also judged that increased fiscalrestraint in the United States would hold back the paceof economic expansion, especially in 2013, and pointedto the situation in Europe as an ongoing downside risk.

The central tendency of participants projections forthe change in real GDP was 2.3 to 2.8 percent for2013, 2.9 to 3.4 percent for 2014, and 2.9 to 3.7 percentfor 2015; these projections were little changed, toslightly below, the ones in December. When partici-pants compared their own March forecast with the onethey made in December, many mentioned that

stronger-than-anticipated incoming data on privateeconomic activity had nearly offset the effects ofgreater-than-expected fiscal restraint likely to be put inplace this year. The central tendency for the longer-runrate of increase of real GDP was 2.3 to 2.5 percent,unchanged from December.

Participants anticipated a gradual decline in the unem-ployment rate over the forecast period; even so, theygenerally thought that the unemployment rate at theend of 2015 would remain well above their individualestimates of its longer-run normal level. The centraltendencies of participants forecasts for the unemploy-ment rate were 7.3 to 7.5 percent at the end of 2013and 6.7 to 7.0 percent at the end of 2014. These pro-jections are slightly lower than in December, with a fewparticipants attributing their revisions to the more fa-vorable data from the labor market or small changes intheir estimated rate of potential output growth. How-ever, the central tendency of the forecasts for the endof 2015, at 6.0 to 6.5 percent, changed little. The cen-

tral tendency of participants estimates of the longer-run normal rate of unemployment that would prevailunder appropriate monetary policy and in the absenceof further shocks to the economy was 5.2 to 6.0 per-cent, the same as in December. Most participants pro-jected that the unemployment rate would converge to

their estimates of its longer-run normal rate in five orsix years, while some judged that less time would beneeded.

As shown in figures 3.A and 3.B, participants viewsregarding the likely outcomes for real GDP growth andthe unemployment rate over the next three years andover the longer run remained diverse, reflecting theirindividual assessments of appropriate monetary policyand its economic effects, the likely rate of improvementin the housing sector and domestic spending more gen-erally, the domestic implications of foreign economicdevelopments, the extent of structural dislocations to

the labor market and the economys productive poten-tial, and a number of other factors. The dispersion ofparticipants projections of real GDP growth was littlechanged relative to December, with a small reductionin the upper end of the distribution in all three years ofthe forecast period and a slight overall downward shiftin 2014. The distributions of the unemployment rateprojections in each year narrowed a few tenths, reflect-ing decreases in the high ends of the ranges. The dis-persion of estimates for the longer-run rate of outputgrowth stayed fairly narrow, with all but four within thecentral tendency of 2.3 to 2.5 percent; two participants,

however, dropped their estimates to below 2.2 percent.The range of participants estimates of the longer-runrate of unemployment, at 5.0 to 6.0 percent, was un-changed relative to December.

The Outlook for InflationParticipants broad outlook for inflation under appro-priate monetary policy suggested that both headline andcore inflation would remain subdued over the 201315period, with nearly all participants judging that inflationwould be equal to or below the FOMCs longer-runobjective of 2 percent in each year. Specifically, thecentral tendency of participants projections for overall

inflation in 2013, as measured by the growth in thePCE price index, narrowed to 1.3 to 1.7 percent, whilethe central tendencies for 2014 and 2015 were un-changed at 1.5 to 2.0 percent and 1.7 to 2.0 percent,respectively. The central tendency of the forecasts forcore inflation in 2013 also narrowed, to 1.5 to 1.6 per-cent, but, unlike overall inflation, edged up slightly in2014 and 2015; nevertheless, the central tendenciesremained near or below 2 percent in both years. In



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Figure 3.A. Distribution of participants projections for the change in real GDP, 201315 and over the longer run

2013


2

4

6

8

1012

14

16

18

20

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

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

March projectionsDecember projections

2014


2

4

6

8

10

12

14

16

18

20

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

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


2

4

6

810

12

14

16

18

20

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

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


2

4

68

10

12

14

16

18

20

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

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.



17/24

Figure 3.B. Distribution of participants projections for the unemployment rate, 201315 and over the longer run

2013


2

4

6

8

1012

14

16

18

20

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- - - - - - - - - - - - - - -

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

Percent range


2014


2

4

6

8

10

12

14

16

18

20

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- - - - - - - - - - - - - - -

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

Percent range

2015


2

4

6

810

12

14

16

18

20

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- - - - - - - - - - - - - - -

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

Percent range

Longer run


2

4

68

10

12

14

16

18

20

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- - - - - - - - - - - - - - -

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

Percent range




18/24

discussing factors likely to keep inflation near theCommittees inflation objective of 2 percent, severalparticipants cited the role of stable inflation expecta-tions and existing resource slack that was expected todiminish only gradually.

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 overallinflation in 2013 and 2014 were almost unchangedcompared with the corresponding distributions for De-cember. The ranges for core inflation were also littlechanged, but, in 2013, many of the projections shiftedtoward the lower end of the range. The distributionsfor core and overall inflation in 2015 remained concen-trated near the Committees longer-run objective, andall participants continued to project that overall infla-tion would converge to the 2 percent goal over thelonger run.

Appropriate Monetary PolicyAs indicated in figure 2, most participants judged thatexceptionally low levels of the federal funds rate wouldremain appropriate for a couple more years. In particu-lar, 13 participants thought that the first increase in thetarget federal funds rate would not be warranted untilsometime in 2015, and one judged that policy firmingwould likely not be appropriate until 2016 (upper pan-el). Five participants judged that an earlier increase inthe federal funds rate, in 2013 or 2014, would be mostconsistent with the Committees statutory mandate.

All of the participants who judged that raising the fed-eral funds rate target would first be appropriate in 2015also projected that the unemployment rate would firstdecline below 6 percent during that year and thatinflation would remain near or below 2 percent. Inaddition, those participants, as well as the participantwho saw liftoff in 2016 as appropriate, also projectedthat a sizable gap between the unemployment rate andthe longer-run normal level of the unemployment ratewould persist until 2015 or later. The majority of thefive participants who judged that policy firming shouldbegin in 2013 or 2014 indicated that the Committeewould need to act relatively soon in order to keep infla-tion near the FOMCs longer-run objective of 2 per-cent and to prevent a rise in inflation expectations.

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 2015 and over the longer run. As previouslynoted, most participants judged that economic condi-tions would warrant maintaining the current low level

of the federal funds rate until 2015. Among the fiveparticipants who saw the federal funds rate leaving theeffective lower bound earlier, their projections for thefederal funds rate at the end of 2014 range from to2 percent. Views on the appropriate level of the fed-eral funds rate at the end of 2015 varied, with 15 partic-

ipants seeing the appropriate level of the federal fundsrate as 1 percent or lower and the others seeing theappropriate level as 2 percent or higher. On balance,participants projections for the appropriate federalfunds rate at the end of 2015 shifted down a bit fromthose in their December forecasts.

Nearly all participants saw the appropriate target forthe federal funds rate at the end of 2015 as still wellbelow their assessment of its expected longer-run val-ue. Estimates of the longer-run target federal fundsrate ranged from 3 to 4 percent, reflecting theCommittees inflation objective of 2 percent and partic-

ipants individual judgments about the longer-run levelof the real federal funds rate.

Participants also described their views regarding theappropriate path of the Federal Reserves balance sheet.All but a few participants thought that, given the cur-rent economic outlook, it would be appropriate for theCommittee to continue purchasing MBS and longer-term Treasury securities at about the current pace atleast through midyear. A number of these participantsanticipated that the pace would be tapered downaround midyear. A few others thought that it would beappropriate for the Committee to purchase securities at

the current pace through the third quarter of 2013 be-fore beginning to adjust the pace and a few saw thecurrent rate of purchases continuing at least throughthe end of 2013, with two participants specifying thatsome purchases would likely extend into 2014. Severalparticipants emphasized that the asset purchase pro-gram was effective in supporting the economic expan-sion, that the benefits continued to exceed the costs,and that additional purchases would be necessary toachieve a substantial improvement in the outlook forthe labor market. In contrast, a couple of participantsindicated that the Committee could best foster its dual

objectives and limit the potential costs of the programby beginning to taper its purchases before midyear orby ending purchases altogether.

Key factors informing participants views of the eco-nomic outlook and the appropriate setting for mone-tary policy included their judgments regarding labormarket conditions that would be consistent with maxi-mum employment, the extent to which employment



19/24

Figure 3.C. Distribution of participants projections for PCE inflation, 201315 and over the longer run

2013


2

4

6

8

1012

14

16

18

20

1.3 1.5 1.7 1.9 2.1 2.3 2.5- - - - - - -

1.4 1.6 1.8 2.0 2.2 2.4 2.6

Percent range


2014


2

4

6

8

10

12

14

16

18

20

1.3 1.5 1.7 1.9 2.1 2.3 2.5- - - - - - -

1.4 1.6 1.8 2.0 2.2 2.4 2.6

Percent range

2015


2

4

6

810

12

14

16

18

20

1.3 1.5 1.7 1.9 2.1 2.3 2.5- - - - - - -

1.4 1.6 1.8 2.0 2.2 2.4 2.6

Percent range

Longer run


2

4

68

10

12

14

16

18

20

1.3 1.5 1.7 1.9 2.1 2.3 2.5- - - - - - -

1.4 1.6 1.8 2.0 2.2 2.4 2.6

Percent range




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Figure 3.D. Distribution of participants projections for core PCE inflation, 201315

2013


2

4

6

8

10

12

1416

18

20

1.5 1.7 1.9 2.1 2.3 2.5- - - - - -

1.6 1.8 2.0 2.2 2.4 2.6

Percent range


2014


2

4

6

8

10

12

14

16

18

20

1.5 1.7 1.9 2.1 2.3 2.5- - - - - -

1.6 1.8 2.0 2.2 2.4 2.6

Percent range

2015


2

4

6

8

10

12

14

16

18

20

1.5 1.7 1.9 2.1 2.3 2.5- - - - - -

1.6 1.8 2.0 2.2 2.4 2.6

Percent range




21/24

Figure 3.E. Distribution of participants projections for the target federal funds rate, 201315 and over the longer run

2013


2

4

6

8

10

12

14

16

18

20

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


2

4

6

8

10

12

14

16

18

20

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


2

4

6

8

10

12

14

16

18

20

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


2

4

6

8

10

12

14

16

18

20

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 or

in the longer run.



22/24

currently 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 thelikely time horizon necessary to return employment andinflation to mandate-consistent levels. Participants

generally discussed their forecasts for the time of thefirst increase in the federal funds rate in the context ofthe thresholds adopted by the Committee in December2012. A couple of participants noted that their assess-ments of the appropriate path for the federal funds ratetook into account the likelihood that the neutral levelof the federal funds rate was currently somewhat belowits historical norm. It was also noted that, because theappropriate stance of monetary policy is conditional onthe path of real activity and inflation over time, assess-ments of the appropriate future path of the federalfunds rate and the balance sheet could change if eco-

nomic conditions were to evolve in an unexpectedmanner.

Uncertainty and RisksA majority of the participants continued to judge thatthe levels of uncertainty about their projections for realGDP growth and unemployment remained higher thanwas the norm during the previous 20 years; however,the number of participants with this view was noticea-bly smaller than in December (figure 4).1 The mainfactor cited as contributing to the elevated uncertaintyabout economic outcomes was the challenge associatedwith forecasting the path of the U.S. economic recov-

ery following a financial crisis and recession that dif-fered markedly from recent historical experience. Sev-eral participants also noted the difficulties involved inpredicting fiscal policy in the United States and the po-tential for European developments to threaten U.S.financial stability, though a few participants noted adecline in the likely severity of those risks as a reasonfor changing their assessments of uncertainty fromhigher to broadly similar to the norm.

A majority of participants, somewhat more than in De-cember, reported that they saw the risks to their fore-casts of real GDP growth and unemployment as broad-

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.

ly balanced, with the remainder generally indicating thatthey saw the risks to their forecasts for real GDPgrowth as weighted to the downside and for unem-ployment as weighted to the upside. Some participantswho changed their assessment to broadly balancedindicated that, while U.S. fiscal policy had becomemore restrictive this year, the future path of that policyhad become less uncertain than it was in December.

Participants reported little change in their assessmentsof the level of uncertainty and the balance of risksaround their forecasts for overall PCE inflation and

core inflation. Thirteen participants judged the levelsof uncertainty associated with their forecasts for thoseinflation measures to be broadly similar to, or lowerthan, historical norms; the same number assessed therisks to those projections to be broadly balanced. Sev-eral participants highlighted the likely role played by theCommittees adoption of a 2 percent inflation goal orits commitment to maintaining accommodative mone-tary policy as contributing to the recent stability oflonger-term inflation expectations. Four participantssaw the risks to their inflation forecast as tilted to thedownside, reflecting, for example, risks of disinflationthat could arise from adverse shocks to the economy

that policy would have limited scope to offset in thecurrent environment. Conversely, a couple of the par-ticipants saw the risks to inflation as weighted to theupside in light of the current highly accommodativestance of monetary policy and their concerns about theCommittees 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

Change in real GDP1 . . . . . . . . 1.3 1.7 1.8

Unemployment rate1 . . . . . . . . . 0.6 1.2 1.7

Total consumer prices2 . . . . . . . 0.9 1.0 1.1

NOTE: Error ranges shown are measured as plus or minus the rootmean squared error of projections for 1993 through 2012 that werereleased in the spring by various private and government forecasters. Asdescribed in the box Forecast Uncertainty, under certain assumptions,there is about a 70 percent probability that actual outcomes for realGDP, unemployment, and consumer prices will be in ranges implied bythe average size of projection errors made in the past. Further infor-mation is in David Reifschneider and Peter Tulip (2007), Gauging theUncertainty of the Economic Outlook from Historical ForecastingErrors, Finance and Economics Discussion Series 2007-60 (Washing-ton: Board of Governors of the Federal 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 measure

that has been most widely used in government and private economicforecasts. Projection is percent change, fourth quarter of the previousyear to the fourth quarter of the year indicated.



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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

March projections

December 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

March projections

December 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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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 1.7 to4.3 percent in the current year, 1.3 to 4.7 per-

cent in the second year, and 1.2 to 4.8 percentin the third year. The corresponding 70 percentconfidence intervals for overall inflation wouldbe 1.1 to 2.9 percent in the current year, 1.0 to3.0 percent in the second year, and 0.9 to3.1 percent in the third year.

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

about 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 theevolution of real activity and inflation over

time. 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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