FOMC participants’ views on unemployment, inflation, and policy
In conjunction with the Federal Open Market Committee (or FOMC) meeting held in the offices of the Board of Governors of the Federal Reserve System in Washington, DC, on June 17–18, the meeting participants submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2014 through 2016 and over the longer run, under each participant’s judgment of appropriate monetary policy.
In assessing labor market conditions, participants offered a range of views on how far conditions in the labor market were from the goal of maximum employment. Many of them expressed that slack remained elevated. A number of participants thought it was greater than what was measured by the official unemployment rate. They specifically mentioned the high level of workers employed part-time for economic reasons or the depressed labor force participation rate.
In aggregate, most participants expected the improvement in labor market conditions to continue, with the unemployment rate decreasing gradually over the medium-term. They discussed the possibility of wage increases picking up as the slack in the labor market goes away.
Inflation was still seen as running below the Committee’s longer-run objective, but longer-run inflation expectations remained stable. The Committee thought that inflation would move back toward its 2% objective during the forecast period.
Some participants expressed concern about the persistence of below-trend inflation. A few of them suggested that the Committee may need to allow the unemployment rate to move below its longer-run normal level for a while in order keep inflation expectations stable and return inflation to its 2% target. However, other participants expected a faster pickup in inflation or saw upside risks to inflation and expectations because they anticipated a quicker decrease in economic slack.
Inflation is one of the major causes for interest rate fluctuations in the economy. Certain exchange-traded funds (or ETFs) like the ProShares Investment Grade-Interest Rate Hedged ETF (IGHG), which has its major holdings in companies like Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM), the SPDR Barclays Capital TIPS ETF (IPE), and the PowerShares Senior Loan Fund (BKLN), are designed to protect the investors against interest rate risk caused by inflation.
Current monetary policy guidance
Participants generally supported the Committee’s current guidance about the likely path of its asset purchases. They also agreed on its approach to determine the timing of the first increase in the federal funds rate and the path of the policy rate. However, varied about the Committee’s communications about its forward guidance.
While the current asset purchase program isn’t on a preset course, participants generally agreed that if the economy evolved as they thought it would, the program would probably be completed later this year. Most participants viewed the timing of the first increase in the Federal funds rate as a decision that will depend on the Committee’s assessments of actual and expected progress toward its objectives.
Participants agreed that with expected improvements in labor market conditions coming through and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases with a $15 billion reduction in the rate of purchases in order to avoid having the small, remaining level of purchases receive unnecessary focus from investors.
If the economy continues to progress in line with the Committee’s expectations, warranting reductions in the rate of purchases at each upcoming meeting, this final reduction of $15 billion would occur after the October meeting.
The FOMC meeting discussed the Committee’s forward guidance. The participants finished with the Committee’s policy action directing the Federal Reserve Bank of New York to conduct transactions according to its revised policy directive and voting by the members on the Statement to be released to the public. We’ll discuss this in the next section in this series.