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October 28–29, 2014 Authorized for Public Release Appendix 1: Materials used by Ms. Logan and Mr. Potter 217 of 258 October 28–29, 2014 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on Financial Developments and Open Market Operations Lorie Logan and Simon Potter October 28, 2014 218 of 258 October 28–29, 2014 Authorized for Public Release 219 of 258 Class II FOMC – Restricted (FR) Exhibit 1 (1) Domestic and Foreign Asset Performance Since FOMC Since Year-End Changes in Basis Points U.S. 10-Year U.K. 10-Year German 10-Year HY Corp. Credit OAS -29 -29 -16 +35 -76 -79 -104 +43 Changes in Percent S&P 500 Index S&P 500 Utilities EuroStoxx 50 Index DXY Dollar Index* -1.8 +4.6 -6.4 +2.0 +6.3 +17.2 -2.5 +7.1 (2) Implied Federal Funds Rate Path* Percent 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 12/31/14 12/31/15 12/31/16 12/31/17 *Derived from federal funds futures and Eurodollar futures. Source: Bloomberg, Federal Reserve Bank of New York, Federal Reserve Board of Governors *Positive value indicates dollar appreciation. Source: Bloomberg, Barclays (3) Probability Distribution of the Timing of Liftoff* (4) Ten-Year Treasury Yield Intraday Ranges* Number of Observations Sep '14 Survey Oct '14 Survey Percent 12/17/13 09/16/14 10/24/14 Median Sep '14 SEP Projection 40 Average (9 BPS) 300 250 30 200 20 150 10 100 LSAP 1 Announced (55 BPS) 10/15/14 (37 BPS) 50 0 ≤2014 2015 2015 2015 2015 2016 2016 ≥2016 Q1 Q2 Q3 Q4 Q1 Q2 Q4 Q3 *Average of all responses from the Survey of Primary Dealers and Survey of Market Participants. Source: Federal Reserve Bank of New York (5) Turnover in Eurodollar and Treasury Futures Contracts* Ratio 1/2/2014 2.5 1/3/2014 1/4/2014 1/5/2014 1/6/2014 Average 10/15/14 0 0 6 12 18 24 30 36 42 48 54 Intraday Range (BPS) *Difference between highest and lowest traded yields in one day. Observations since October 1998. Source: Bloomberg (6) Standardized Implied Volatility Index* Standard Deviations 2 JEC 2.0 10/15/14 1 1.5 0 1.0 -1 0.5 0.0 Eurodollar 2-Year 5-Year 10-Year *Daily trading volume divided by open interest. Daily data since September 2008. Boxes show interquartile ranges and medians; whiskers show maximum and minimum values. Source: Bloomberg -2 01/01/11 01/01/12 01/01/13 01/01/14 *Standardized 1-month equity, currency, short-rate, and long-rate implied volatilities since June 1994. Source: Bloomberg, CBOE, Deutsche Bank, Barclays, Federal Reserve Bank of New York Staff Calculations October 28–29, 2014 Authorized for Public Release 220 of 258 Class II FOMC – Restricted (FR) Exhibit 2 (7) Measures of U.S. Inflation Expectations (8) Decomposition of the Decline in the Five-Year, Five-Year Forward Breakeven* Board Five-Year, Five-Year Inflation Compensation Primary Dealer Five-Year, Five-Year Estimate* Expected Average CPI Inflation Inflation Risk Premia Other Risk Premia Percent 3.0 LSAP 3 JEC Sep '14 FOMC 2.8 BPS Dealers Buy Side 0 -4 2.6 -8 2.4 -12 2.2 -16 2.0 01/01/12 01/01/13 -20 01/01/14 *Average modal expectation for five-year CPI inflation, five years ahead. Source: Federal Reserve Board of Governors, Federal Reserve Bank of New York *From 09/02/14 to 10/15/14. The survey question asked specifically about the Bloomberg measure of the five-year, five-year forward breakeven rate. Average of responses shown. Source: Federal Reserve Bank of New York (9) Commodities and China-Sensitive Equities (10) Currency Performance S&P GSCI Industrial Metal Index (LHS) MSCI World with China Exposure Index (LHS) Front-Month Brent Crude Futures Contract (RHS) Indexed to 12/31/13 DXY Index ex. Euro (LHS) Euro-Dollar (RHS, Inverted) Dollars per Euro Dollar per Bbl 108 110 120 106 105 110 104 100 100 102 1.34 95 90 100 1.38 Indexed to 12/31/13 Sep '14 FOMC 90 01/01/14 80 04/01/14 07/01/14 10/01/14 Source: Bloomberg, MSCI Jackson Hole Oct '14 ECB 2.0 1.8 Source: Barclays Dollar Appreciation, Euro Depreciation 98 01/01/14 1,000 800 600 400 200 0 -200 -400 -600 VLTRO and SMP payback 04/01/14 1.30 1.42 04/01/14 € Billions 2.2 1.6 01/01/14 1.26 07/01/14 10/01/14 (12) Potential ECB Balance Sheet Expansion Percent May '14 ECB 1.22 Sep '14 FOMC Source: Bloomberg, Federal Reserve Bank of New York Staff Calculations (11) Euro-Area Five-Year, Five-Year Forward Inflation Swap 2.4 May '14 ECB 07/01/14 10/01/14 Range of Estimates Central Tendency Roll into MRO TLTROs ABS and Covered Bonds Source: European Central Bank, Reuters, Dealer Estimates, Federal Reserve Bank of New York Staff Calculations October 28–29, 2014 Authorized for Public Release 221 of 258 Class II FOMC – Restricted (FR) Exhibit 3 (13) Euro Reserves Portfolio Duration (14) MBS Purchase Offer-to-Cover Ratio* Duration (Months) Ratio 10 20 18 FOMC-Authorized Limit 8 16 6 14 4 12 10/15/14 Internal Limit 2 10 0 06/01/14 8 04/01/14 06/01/14 08/01/14 10/01/14 Source: Federal Reserve Bank of New York 07/01/14 08/18/14 09/07/14 $ Billions QuarterEnd Sep '14 FOMC 09/27/14 10/17/14 *Daily survey of primary dealers. Source: Federal Reserve Bank of New York Total Allotment Total Allotment on Month- or Quarter-End Bids Exceeding $300 Billion Overall Size Limit 450 400 Overall Size Limit 350 (Effective 09/22/14) 300 250 200 150 100 50 0 04/07/14 05/20/14 07/02/14 08/14/14 9/26/2014 Source: Federal Reserve Bank of New York (18) Changes in Money Market Rates and Volumes on Quarter-Ends* (17) Distribution of ON RRP Counterparty Propositions by Rate September Quarter-End Average of Non-Quarter-End Dates* Percent 70 10/01/14 (16) ON RRP Operation Results Fed Funds Effective Rate Eurodollar Effective Rate ON RRP Rate Treasury Repo Rate* 12 10 8 6 4 2 0 -2 -4 07/29/14 09/01/14 *Offered amounts are adjusted to exclude aggregate dealer offers that are larger than the publicly-stated maximum size of the operation. Source: Federal Reserve Bank of New York (15) Overnight Interest Rates BPS 08/01/14 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Rates (BPS) 60 Brokered Fed Funds -1 -2 -1 -2 50 Brokered Eurodollars -4 -4 -6 -11 40 Treasury Repo** -2 0 2 -4 30 Volumes (Percent) 20 Brokered Fed Funds -61 -33 -57 -57 10 Brokered Eurodollars -61 -60 -66 -61 Treasury Repo** -11 -6 -13 -15 0 ≤-4 -3 -2 -1 0 1 2 BPS *All dates from 09/22/14 through 10/24/14, excluding 09/30/14. Source: Federal Reserve Bank of New York 3 ≥4 *Difference between quarter-end value and the average value over the previous five business days. **Daily survey of primary dealers. Source: Federal Reserve Bank of New York October 28–29, 2014 Authorized for Public Release 222 of 258 Class II FOMC – Restricted (FR) Exhibit 4 (Last) (19) TDF Operation Results* $ Billions 1.00 200 Allotment, No Breakability (LHS) Allotment, With Breakability Feature (LHS) Number of Participants (RHS) 2.00 3 4 5 6 7Number 80 160 (20) Current and Potential Money Market Mutual Fund ON RRP Counterparties Counterparty Status Fund Type Number of Firms AUM ($ Billions) Current Gov't Prime Total 32 62 94 560 1,460 2020 Likely to Apply* Gov't Prime Total 11 2 13 123 18 141 Additional Firms that Appear Eligible** Gov't Prime Total 1 7 8 18 79 97 60 120 40 80 20 40 0 0 $5 Billion Cap $10 Billion Cap *Operations offered at 26 basis points. Source: Federal Reserve Board of Governors (21) Daily Federal Funds Volumes Brokered FR 2420 $ Billions 80 (22) Segregated Balance Accounts • Remove credit risk by creating narrow accounts that would allow small or regional banks to compete for money market funds. 70 • Benefits: Could increase competition for deposits, reduce system-wide balance sheet costs, and improve the transmission of monetary policy. 60 50 40 • Risks and Uncertainties: May reduce fed funds arbitrage activity. Legal and regulatory issues must be resolved. 30 20 10 0 04/01/14 *Indicated interest and has ability to invest in repo. **Has not indicated interest but has the ability to invest in repo. Source: Federal Reserve Bank of New York, SEC Form N-MFP 06/01/14 08/01/14 10/01/14 Source: Federal Reserve Bank of New York (23) Potential Next Steps • Engage in further discussions with the FDIC, the OCC, banks, and potential lenders into SBAs. • Develop contractual language. • Begin modification of STAR and other applications to accommodate the accounts. October 28–29, 2014 Authorized for Public Release Appendix 2: Materials used by Mr. Natalucci 223 of 258 October 28–29, 2014 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on Proposals for Reverse Repurchase Agreement Operations Fabio Natalucci October 28, 2014 224 of 258 October 28–29, 2014 Authorized for Public Release 225 of 258 Class I FOMC - Restricted Controlled (FR) October 28, 2014 Testing of Reverse Repos: Possible Further Steps Testing ON RRP Rate Changes • Staff recommends modest decreases and increases in ON RRP rate after the October meeting. • This test could provide additional information about: The effect of the spread to IOER on money markets and demand for ON RRP. The effectiveness of the ON RRP rate as a floor for short-term rates. • Staff recommends that a schedule of ON RRP rate changes be preannounced. Testing Term RRPs at Year-End • Anticipated year-end pressure due to balance sheet constraints raises two questions: 1. Does the Committee desire to take action to address it? 2. If so, what action could the Committee take? • The Committee may wish to test supplementary tools to improve control over short-term rates. If so, staff recommends a series of term RRP operations. Would provide opportunity to test utility of supplementary tools prior to liftoff. Would increase availability of safe money market instruments ahead of year-end. May signal that the Committee is prepared to deploy additional tools if warranted. Exercise could be sized to offset anticipated decline in safe money market assets. Could announce following this meeting term RRP operations in December to cross year-end. Cumulative size limit of up to $300 billion. Specific operational details to be announced by early December. • Alternatively, the Committee may find it desirable to take no action: If concerned about appearing to accommodate "window dressing" by banks. If comfortable with potentially significant pressure on short-term rates. Would provide a second observation of current framework on quarter-ends. Could reinforce FOMC’s earlier communication. Page 1 of 2 October 28–29, 2014 Authorized for Public Release 226 of 258 Class I FOMC – Restricted Controlled (FR) Resolutions Resolution 1: Modification to ON RRP Operations The Federal Open Market Committee (FOMC) modifies the authorization concerning overnight reverse repurchase operations adopted at the September 17, 2014, FOMC meeting as follows: (i) The offering rate of the operations may vary from zero to ten basis points. This modification shall be effective beginning with the operation conducted on November 3, 2014, and conclude with the operation conducted on December 12, 2014. Resolution 2: Term Reverse Repurchase Operations During the period of December 1, 2014, to December 30, 2014, the Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of term reverse repurchase operations involving U.S. Government securities. Such operations shall: (i) (ii) (iii) (iv) mature no later than January 5, 2015. be subject to an overall size limit of $300 billion outstanding at any one time. be subject to a maximum bid rate of ten basis points. be awarded to all submitters: (A) (B) at the highest submitted rate if the sum of the bids received is less than or equal to the pre-announced size of the operation; or at the stopout rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the preannounced size of the operation, with all bids below this rate awarded in full at the stopout rate and all bids at the stopout rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the pre-announced size of the operation. Such operations may be for forward settlement. The System Open Market Account manager will inform the FOMC in advance of the terms of the planned operations. The Chair must approve the terms of, timing of the announcement of, and timing of the operations. These operations shall be conducted in addition to the authorized overnight reverse repurchase agreements, which remain subject to a separate overall size limit of $300 billion per day. Page 2 of 2 October 28–29, 2014 Authorized for Public Release Appendix 3: Materials used by Mr. Engen 227 of 258 October 28–29, 2014 Authorized for Public Release Class II FOMC – Restricted (FR) Material for The U.S. Outlook Eric Engen October 28, 2014 228 of 258 October 28–29, 2014 Authorized for Public Release 229 of 258 Forecast Summary 6. Two Risks to the Staff Baseline • Lower long-term inflation expectations • Financial market turbulence October 28–29, 2014 Authorized for Public Release Appendix 4: Materials used by Mr. Kamin 230 of 258 October 28–29, 2014 Authorized for Public Release Class II FOMC – Restricted (FR) Material for The Foreign Outlook Steven B. Kamin October 28, 2014 231 of 258 October 28–29, 2014 Authorized for Public Release 232 of 258 Exhibit 1 Class II FOMC - Restricted (FR) The Outlook for Foreign Economies and the Dollar 2. Foreign GDP and New Export Orders 1. Foreign GDP Percent change, annual rate 6 60 5 55 Diffusion Index Percent change, annual rate 8 September TB Emerging market economies Foreign GDP 6 4 4 Total 50 Q3 est. 3 2 0 45 Advanced foreign economies 2012 2013 2014 2015 1 -2 New Export Orders 2 40 -4 -6 2016 0 35 -1 30 -8 -10 2007 2008 2009 2010 2011 2012 2013 2014 2017 3. Euro-Area GDP 4. China: GDP and Property Markets Percent change, annual rate 6 150 Index [Jan. 2007=100] Percent change, annual rate 25 4 140 0 20 Property price index 2 130 15 -2 120 History and current forecast September TB Eurocoin prediction -4 -6 10 110 -8 GDP: History and current forecast GDP: September TB 100 -10 -12 2007 2009 2011 2013 5. Real Broad Dollar Index 2007:Q1 = 100 90 2017 0 2007 2009 6. Real AFE Dollar Index 110 Current forecast Unrevised approach July Tealbook 2015 2007:Q1 = 100 July Tealbook 100 2011 2013 2015 2017 7. Real EME Dollar Index 115 Current forecast 105 5 2007:Q1 = 100 110 Current forecast 110 Unrevised approach July Tealbook 105 105 100 100 95 95 90 90 85 85 80 95 90 85 80 2007 2009 2011 2013 2015 2017 80 2007 2009 2011 2013 2015 2017 Page 1 of 2 75 2007 2009 2011 2013 2015 2017 October 28–29, 2014 Authorized for Public Release 233 of 258 Exhibit 2 Class II FOMC - Restricted (FR) Effect of a Ten Percent Appreciation Shock to the Dollar 1. Real Broad Dollar Index 2. Federal Funds Rate 2007:Q1 = 100 History and baseline Stronger dollar (without monetary policy response) Stronger dollar (with monetary policy response) Percent, annual rate 110 History and baseline Stronger dollar (without monetary policy response) Stronger dollar (with monetary policy response) 105 100 3.5 3.0 2.5 2.0 95 1.5 90 1.0 85 0.5 80 2008 2010 2012 2014 0.0 2016 2008 3. U.S. Real GDP 2010 2012 2014 2016 4. U.S. Core Inflation 4-qtr percent change 4-qtr percent change 5 History and baseline Stronger dollar (without monetary policy response) Stronger dollar (with monetary policy response) 4 3 2 3.0 2.5 2.0 1 0 History and baseline Stronger dollar (without monetary policy response) Stronger dollar (with monetary policy response) 1.5 -1 1.0 -2 -3 0.5 -4 -5 2008 2010 2012 2014 2016 0.0 2008 Page 2 of 2 2010 2012 2014 2016 October 28–29, 2014 Authorized for Public Release Appendix 5: Materials used by Ms. Liang 234 of 258 October 28–29, 2014 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on Financial Stability Developments Nellie Liang October 28, 2014 235 of 258 October 28–29, 2014 Authorized for Public Release Class II FOMC - Restricted (FR) 236 of 258 Exhibit 1 October 28, 2014 Financial Stability Developments Surplus Fully Phased-in Basel III Common Equity Percentage points Tier 1 Ratio 2014Q2 2014Q3 Net Short-term Wholesale Debt of Financial Sector-to-GDP Ratio 5 Ratio Quarterly 4 0.4 0.3 3 0.2 2 Q2 1 JPM BAC CITI WFC GS MS BK STT 0 1984 Note: Surplus is calculated as estimated percentage of tier 1 common equity minus the FSB requirement including the SIFI surcharge. STT data for Q2 are not available. Source: Bank earnings releases. Nonfinancial sector credit-to-GDP ratio Ratio Quarterly Q2 1989 1994 1999 2004 2009 2014 0.1 0.0 Source: FOFA S&P 500 Equity Premium 2.0 Monthly 1.6 Percent Expected 10-year real equity return* Expected real yield on 10-year Treasury** 16 14 12 10 1.2 +Oct. 27 Household 0.8 8 6 4 2 Business 1984 1989 1994 +Oct. 0.4 27 1999 2004 2009 2014 1986 1990 1994 1998 2002 2006 2010 2014 High Yield Bond Spreads Percent Monthly Commercial Real Estate 14 12 10 8 Oct. 6 4 2 2003 2006 2009 2012 2015 Ratio 18 16 Near-Term* Far-Term** 2000 -2 Note: *Staff estimate using a dividend discount model incorporating private sector earnings growth estimates. **Off-the-run 10-year treasury yield less Philadelphia Fed 10-year expected inflation Source: Thomson Reuters Financial. Source: FOFA. 1997 0 0 Billions of dollars Monthly Annual Rate 18 250 Price-to-Income (left axis) CMBS (right axis) 16 200 14 150 Q3 12 Q2 Q1 10 8 Note: * Near-Term spread between years two and three. ** Far-Term spread between years nine and ten. Source: Staff estimates. 50 2003 2005 2007 2009 2011 2013 2014 Note: Price-to-Income is a 3-month moving average. Source: Commercial Mortgage Alert and Thomson Reuters. Page 1 of 3 100 0 October 28–29, 2014 Authorized for Public Release Class II FOMC - Restricted (FR) Billions of Dollars Leveraged Loan Issuance by Loan Rating Billions of dollars Percent Annual Rate High Yield Bonds Leveraged Loans Split BBB or higher BB+/BB/BBSplit BB/B 1000 * Total outstanding (left axis) 1600 October 28, 2014 Financial Stability Developments Leveraged Loan and High Yield Bond Issuance 2000 237 of 258 Exhibit 2 B+/B/BSplit B/CCC, CCC Not Rated Q1 Q2 Q3 Q3 100 800 80 1200 600 800 400 400 200 60 0 40 20 0 2004 2006 2008 2010 2012 2014 0 2004 Note: Total outstanding is annual data. * 2014 estimate is growth to Q3 at an annual rate. Source: Thomson Reuters LPC Loan Connector. 2006 2008 2010 2012 2014 Source: S&P LCD Nonfinancial Corporate Net Leverage Ratio Credit Cycle Percent 40 Speculative-grade Investment-grade 35 Q2 p 25 20 15 10 1996 1999 2002 2005 2008 2011 2014 · Rapid rise in riskier debt would result in notably higher default rates and lower returns relative to moderate debt growth · If losses borne by leveraged investors, credit cycle would be more severe · Losses could be exacerbated by growing liquidity mismatch 30 5 Note: Net leverage is total debt minus cash and cash equivalents to total assets. Data are annual until 1999 and quarterly thereafter. Speculative-grade includes unrated firms. Source: Compustat. U.S. Corporate Bond Fund and Dealer Corporate Bond Holdings Fund Redemptions at PIMCO Percent Percent of Assets 40 Annual Rate 5 Bill Gross resignation US Corporate Credit MFs and ETFs Dealer Corporate Bond Holdings Q2 Total Return Fund Other funds by Gross Funds by other managers 30 4 3 20 2 10 1 0 2001 2003 2005 2007 2009 2011 2013 9/26 Note: Percent of US public corporate bond market. Source: Flow of Funds, ICI, Mergent FISD 9/29 9/30 10/1 10/2 10/3 10/6 Note: CONFIDENTIAL Source: Calculations based on State Street Corporation and Morningstar. Total assets at the end of September. Page 2 of 3 0 October 28–29, 2014 Authorized for Public Release Class II FOMC - Restricted (FR) Exhibit 3 Financial Stability Developments Policy Initiatives · Leveraged lending · CCAR macroeconomic scenarios · Interest rate risk at banks · Asset management activities · Algorithmic and high frequency trading Page 3 of 3 238 of 258 October 28, 2014 October 28–29, 2014 Authorized for Public Release Appendix 6: Materials used by Mr. English 239 of 258 October 28–29, 2014 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on Monetary Policy Alternatives Bill English October 28-29, 2014 240 of 258 October 28–29, 2014 Authorized for Public Release 241 of 258 Policy Issues Average Monthly Change in Labor Market Conditions Index Points Index Unemployment Rate and Persons Working Part Time for Economic Reasons Percent 7 12 Unemployment Rate Part Time for Economic Reasons* Unemployed for 27+ Weeks* 6 10 5 Sept. 8 4 6 3 4 2 2 1 0 Q3 Q4 2012 Q1 Q2 Q3 2013 Q4 Q1 0 2004 2006 2008 2010 2012 2014 *Calculated as a percentage of total U.S. civilian labor force. Note: Shaded region represents NBER recession. Source: U.S. Department of Labor, Bureau of Labor Statistics. Q2 Q3 2014 Source: Staff calculations. TIPS-Based Inflation Compensation Survey-Based Expectations of Longer-Run Inflation Percent TIPS-Implied 5-to-10-Year Inflation Expectations 10-Year TIPS 5-Year TIPS Percent Primary Dealer Survey* Blue Chip Economic Indicators University of Michigan Survey of Consumers 3.5 3.6 3.4 3.2 3.0 3.0 2.8 2.5 2.6 2.0 2.4 2.2 1.5 2.0 2011 2012 2013 2014 2011 Source: Bloomberg. 2012 2013 *Note: Median most likely inflation. Source: FRBNY Primary Dealers Survey, Blue Chip Economic Indicators, University of Michigan Survey of Consumers. Forward Guidance • Focuses more explicitly on the target range for the federal funds rate. • Alternative B: Would retain the reference to "considerable time" but start the clock at the end of the asset purchase program "this month." Would add language emphasizing the data-dependence of the timing of the first rate increase. • 2014 Options for updating the forward guidance: Could use paragraphs 1 and 2 to update the Committee’s assessment of economic conditions. Could adjust the reference to "considerable time" as the anticipated timing of liftoff approaches. Page 1 of 13 October 28–29, 2014 Authorized for Public Release 242 of 258 SEPTEMBER 2014 FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective. Longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year. 3. The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Page 2 of 13 October 28–29, 2014 Authorized for Public Release 243 of 258 Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. 5. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to ¼ percent target range for the federal funds rate, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. 6. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 3 of 13 October 28–29, 2014 Authorized for Public Release 244 of 258 FOMC STATEMENT—OCTOBER 2014 ALTERNATIVE A 1. Information received since the Federal Open Market Committee met in July September suggests that economic activity is expanding at a moderate pace. On balance, Labor market conditions improved somewhat further; however, with a lower the unemployment rate. is little changed and Even so, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Financial conditions have tightened, on balance. Inflation has been running continued to run below the Committee’s longer-run objective. Market-based measures of longer-term inflation expectations have remained stable declined somewhat. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. However, developments in financial markets here and abroad have increased the Committee sees the downside risks to the outlook for economic activity, and the labor market, as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year and inflation, making the outlook more uncertain. 3. The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, In light of the increase in downside risks and greater uncertainty, the Committee will continue to add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month, while assessing incoming information that bears on the outlook for economic activity, the labor market, and inflation. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, Page 4 of 13 October 28–29, 2014 Authorized for Public Release 245 of 258 until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. 5. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to ¼ percent target range for the federal funds rate, the Committee will assess progress— both realized and expected—toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and at least as long as inflation between one and two years ahead is projected to be below 2 percent, provided that longer-term inflation expectations remain well anchored. 6. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 5 of 13 October 28–29, 2014 Authorized for Public Release 246 of 258 FOMC STATEMENT—OCTOBER 2014 ALTERNATIVE B 1. Information received since the Federal Open Market Committee met in July September suggests that economic activity is expanding at a moderate pace. On balance, Labor market conditions improved somewhat further; however, with solid job gains and a lower the unemployment rate. is little changed and On balance, a range of labor market indicators suggests that there remains significant underutilization of labor resources is gradually diminishing. Household spending appears to be is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running continued to run below the Committee’s longer-run objective. Marketbased measures of inflation compensation have declined somewhat; surveybased measures of longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, and the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year. 3. The Committee currently judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions progress toward maximum employment in a context of price stability. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s sizable and still-increasing holdings of longer-term securities at sizable levels, should help maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader accommodative financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate. Page 6 of 13 October 28–29, 2014 Authorized for Public Release 247 of 258 4. The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. 4. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how long to maintain the current 0 to ¼ percent this target range for the federal funds rate, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate anticipates, based on its current assessment of these factors, that it likely will be appropriate to maintain the current 0 to ¼ percent target range for the federal funds rate for a considerable time after following the end of its asset purchase program ends this month, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated. 5. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 7 of 13 October 28–29, 2014 Authorized for Public Release 248 of 258 FOMC STATEMENT—OCTOBER 2014 ALTERNATIVE C 1. Information received since the Federal Open Market Committee met in July September suggests that economic activity is expanding at a moderate pace. On balance, Labor market conditions improved somewhat further; however, with solid job gains and a lower the unemployment rate. is little changed and A range of labor market indicators suggests that there remains significant underutilization of labor resources is diminishing. Household spending appears to be is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longerrun objective. Longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year. 3. The Committee currently judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions progress toward maximum employment in a context of price stability. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s sizable and still-increasing holdings of longer-term securities at sizable levels, should help maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader accommodative financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price Page 8 of 13 October 28–29, 2014 Authorized for Public Release 249 of 258 stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. 4. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how long to maintain the current 0 to ¼ percent this target range for the federal funds rate, the Committee will assess progress—both realized and expected—toward its objectives. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate anticipates, based on its current assessment of these factors, that it likely will be appropriate to maintain the current 0 to ¼ percent target range for the federal funds rate for a considerable time after following the end of its asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated. 5. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after as employment and inflation are near approach mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 9 of 13 October 28–29, 2014 Authorized for Public Release 250 of 258 SEPTEMBER 2014 DIRECTIVE Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in October, the Desk is directed to purchase longer-term Treasury securities at a pace of about $10 billion per month and to purchase agency mortgage-backed securities at a pace of about $5 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 10 of 13 October 28–29, 2014 Authorized for Public Release 251 of 258 DIRECTIVE FOR OCTOBER 2014 ALTERNATIVE A Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in October, The Desk is directed to purchase longer-term Treasury securities at a pace of about $10 billion per month and to purchase agency mortgage-backed securities at a pace of about $5 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 11 of 13 October 28–29, 2014 Authorized for Public Release 252 of 258 DIRECTIVE FOR OCTOBER 2014 ALTERNATIVE B Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in October The Desk is directed to purchase conclude the current program of purchases of longer-term Treasury securities at a pace of about $10 billion per month and to purchase agency mortgage-backed securities at a pace of about $5 billion per month by the end of October. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 12 of 13 October 28–29, 2014 Authorized for Public Release 253 of 258 DIRECTIVE FOR OCTOBER 2014 ALTERNATIVE C Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in October The Desk is directed to purchase conclude the current program of purchases of longer-term Treasury securities at a pace of about $10 billion per month and to purchase agency mortgage-backed securities at a pace of about $5 billion per month by the end of October. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 13 of 13 October 28–29, 2014 Authorized for Public Release Appendix 7: Materials used by Mr. Tetlow 254 of 258 October 28–29, 2014 Authorized for Public Release 255 of 258 Class I FOMC – Restricted Controlled (FR) Material for Briefing on Longer-Run Goals and Monetary Policy Strategy (“Consensus Statement”) Robert Tetlow October 29, 2014 October 28–29, 2014 Authorized for Public Release 256 of 258 Briefing on possible amendments to the “Consensus Statement” Three topics for discussion at this meeting: Clarification of the symmetry of inflation preferences Clarification of the “balanced approach” monetary policy strategy Clarification of the potential role of monetary policy in promoting financial stability Symmetry of preferences for inflation Why might symmetry be preferred and communicated? o Provides a clear focal point for long-term inflation expectations o Facilitates clear communications o Fosters transparency and public accountability Why might participants have asymmetric preferences? o The costs of inflation may be asymmetric around two percent o Possible asymmetries in the dynamics of long-term inflation expectations “Balanced approach” Balanced approach as a statement about the Committee’s loss function o Equal weights in the loss function Balanced approach as a statement about the Committee’s reaction function o Time horizons for returning goal variables to target are similar o Conditions for tolerating over- or undershooting a mandate variable o Tradeoffs between mandate variables always matter Financial stability and the Dual Mandate The role of monetary policy in promoting financial stability o Macroprudential and supervisory tools are the first line of defense o Imprudent to assume that these tools can be consistently relied upon What makes financial instability different from other asymmetric risks? o Monetary policy may affect the probability of financial instability o Financial instability can reduce the efficacy of monetary policy Responding to incipient instability o An episodic phenomenon inducing a temporary response o The appropriate response is not always straightforward Why the current Consensus Statement might be the preferred option The risk that the public might misinterpret any changes The option value of waiting The current Statement is a delicate balance Page 1 of 2 October 28–29, 2014 Authorized for Public Release 257 of 258 Questions for the Committee Discussion of the Consensus Statement on Longer-Run Goals and Monetary Policy Strategy at the October 2014 Meeting 1. Should the Consensus Statement be modified to clarify the symmetry of the Committee’s preferences for inflation relative to its 2 percent longer-run objective? For example, should it be made clearer that inflation below the Committee's 2 percent longer-run objective is considered to be equally as undesirable as inflation the same amount above that objective? 2. Should the Consensus Statement elaborate on the “balanced approach” language used in paragraph 5, or do you judge that there is no further elaboration which would still encompass the diversity of views among Committee participants regarding their preferences over the dual-mandate goals? 2.a Do you interpret “balanced approach” as connoting equal weights on the two parts of the dual mandate goals – specifically, that a miss of inflation relative to its longer-run objective is generally as costly in the Committee’s objective function as an equal-sized miss in the unemployment rate relative what the Committee judges to be its’ mandate consistent level? If so, should this be stated explicitly in the Consensus Statement? 3. Should the Consensus Statement be modified to further clarify the relationship between the objective of financial stability and the dual-mandate goals of price stability and maximum employment, or are you comfortable with the current statement’s treatment of financial stability? If you prefer enhancements, 3.a Should financial stability be included in paragraph 5 in the discussion of the approach the Committee takes in promoting its dual-mandate goals? 3.b Should the statement include the recognition that in some circumstances when financial stability appears to be at risk, the stance of monetary policy may have to be adjusted in order to mitigate risks to financial stability? 4. Looking ahead, are there other portions of the Consensus Statement that you would like the subcommittee to study during 2015? Are there revisions to other communications tools or additional tools that the subcommittee should consider on behalf of the FOMC? For example, do you see promising opportunities to improve the SEP? Do you believe it is time again to consider a consensus forecast? Page 2 of 2 October 28–29, 2014 Authorized for Public Release 258 of 258 Statement on Longer-Run Goals and Monetary Policy Strategy As amended effective January 28, 2014 The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of pro moting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary poli cy decisions to the public as clearly as possi ble. Such clarity facilitates well-informed decisionmaking by households and business es, reduces economic and financial uncertain ty, increases the effectiveness of monetary policy, and enhances transparency and ac countability, which are essential in a demo cratic society. Inflation, employment, and long-term inter est rates fluctuate over time in response to economic and financial disturbances. More over, monetary policy actions tend to influ ence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Com mittee’s goals. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Commit tee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal con sumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. Communicating this infla tion goal clearly to the public helps keep longer-term inflation expectations firmly an chored, thereby fostering price stability and moderate long-term interest rates and enhanc ing the Committee’s ability to promote maxi mum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and sub ject to revision. The Committee considers a wide range of indicators in making these as sessments. Information about Committee participants’ estimates of the longer-run nor mal rates of output growth and unemployment is published four times per year in the FOMC’s Summary of Economic Projections. For example, in the most recent projections, FOMC participants’ estimates of the longerrun normal rate of unemployment had a cen tral tendency of 5.2 percent to 5.8 percent. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employ ment from the Committee’s assessments of its maximum level. These objectives are general ly complementary. However, under circum stances in which the Committee judges that the objectives are not complementary, it fol lows a balanced approach in promoting them, taking into account the magnitude of the devi ations and the potentially different time hori zons over which employment and inflation are projected to return to levels judged consistent with its mandate. The Committee intends to reaffirm these principles and to make adjustments as appro priate at its annual organizational meeting each January.
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