Board of Governors of the Federal Reserve System

Minutes of the Federal Open Market Committee

September 19-20, 2017
In conjunction with the Federal Open Market Committee (FOMC) meeting held on September 19-20, 2017, meeting participants submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2017 to 2020 and over the longer run.¹ Each participant's projections were based on information available at the time of the meeting, together with his or her assessment of appropriate monetary policy--including a path for the federal funds rate and its longer-run value--and assumptions about other factors likely to affect economic outcomes. The longer-run projections represent each participant's assessment of the value to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy.² "Appropriate monetary policy" is defined as the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her individual interpretation of the Federal Reserve's objectives of maximum employment and stable prices.

All participants who submitted longer-run projections expected that, under appropriate monetary policy, growth in real gross domestic product (GDP) this year would run somewhat above their individual estimates of its longer-run rate. Almost all participants projected that economic growth would moderate over the next three years, and almost all projected that real GDP growth in 2019 and 2020 would be at or close to their individual estimates of the economy's longer-run potential growth rate. All participants who submitted longer-run projections expected that the unemployment rate would run below their estimates of its longer-run normal level in 2017, and almost all projected that the unemployment rate would remain below their estimates of its longer-run level through 2020. All participants projected that inflation, as measured by the four-quarter percentage change in the price index for personal consumption expenditures (PCE), would run below 2 percent in 2017 and then step up in the next three years; about half of them projected that inflation would be at the Committee's 2 percent objective in 2019 and 2020, and all judged that inflation would be within a couple of tenths of a percentage point of the objective in those years. Most participants commented on the effects of Hurricanes Harvey and Irma and judged that there would likely be some effect on national economic activity and inflation in the near term but little effect in the medium term.³ Table 1 and figure 1 provide summary statistics for the projections.

Figure 1. Medians, central tendencies, and ranges of economic projections, 2017-20 and over the longer run*

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As shown in figure 2, participants generally expected that evolving economic conditions would likely warrant further gradual increases in the federal funds rate to achieve and sustain maximum employment and 2 percent inflation. Although some participants lowered their federal funds rate projections since June, the median projections for the federal funds rate in 2017 and 2018 were unchanged; the median projection for 2019 was slightly lower, and the median projection for the longer-run normal level of the federal funds rate edged down. However, because of considerable uncertainty about how the economy will evolve, the actual path of short-term interest rates, including the federal funds rate, can differ substantially from projections.

Figure 2. FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate*

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In general, participants viewed the uncertainty attached to their economic projections as broadly similar to the average of the past 20 years, and all participants saw the uncertainty associated with their forecasts for real GDP growth, the unemployment rate, and inflation as unchanged from June. Most participants judged the risks around their projections for economic growth, the unemployment rate, and inflation as broadly balanced.

The Outlook for Economic Activity
The median of participants' projections for the growth rate of real GDP, conditional on their individual assumptions about appropriate monetary policy, was 2.4 percent in 2017, about 2 percent in 2018 and 2019, and 1.8 percent in 2020; the median of projections for the longer-run normal rate of real GDP growth was 1.8 percent. Compared with the June Summary of Economic Projections (SEP), the median of the forecasts for real GDP growth for 2017 was a bit higher, while the medians for 2018 and 2019, as well as the median assessment of the longer-run growth rate, were mostly unchanged. Most participants did not incorporate expectations of fiscal stimulus in their projections. Several participants who included some fiscal stimulus indicated that they had marked down its expected magnitude relative to their June projections.

The median of projections for the unemployment rate in the fourth quarter of 2017 was 4.3 percent, unchanged from June and 0.3 percentage point below the median assessment of its longer-run normal level. The medians of the unemployment rate projections for 2018 through 2020 were a little above 4 percent. The median estimate of the longer-run normal rate of unemployment was 4.6 percent, unchanged from June.

Figures 3.A and 3.B show the distributions of participants' projections for real GDP growth and the unemployment rate from 2017 to 2020 and in the longer run. The distribution of individual projections for real GDP growth for this year shifted up, with half of the participants now expecting real GDP growth of 2.4 or 2.5 percent and none seeing it below 2.2 percent. The distribution of projected real GDP growth in 2018 also shifted up a bit, while the distributions in 2019 and in the longer run were broadly similar to the distributions of the June projections. The distributions of individual projections for the unemployment rate in 2018 and 2019 shifted down slightly.

Figure 3.A. Distribution of participants' projections for the change in real GDP, 2017-20 and over the longer run*

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Figure 3.B. Distribution of participants' projections for the unemployment rate, 2017-20 and over the longer run*

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The Outlook for Inflation
The median of projections for headline PCE inflation was 1.6 percent this year, 1.9 percent next year, and 2 percent in 2019 and 2020, about unchanged from June. Most participants anticipated that inflation would continue to run slightly below 2 percent in 2018, while no participants expected inflation above 2 percent in that year. About half projected that inflation would be equal to the Committee's objective in 2019 and 2020; others projected that inflation would run a little above or below the Committee's objective in one or both of those years. The median of projections for core PCE inflation was 1.5 percent in 2017 and 1.9 percent in 2018, a decline of 0.2 percentage point and 0.1 percentage point from June, respectively. The median projection for core PCE inflation in 2019 and 2020 was 2.0 percent.

Figures 3.C and 3.D provide information on the distributions of participants' views about the outlook for inflation. The distributions of projections for headline PCE inflation and for core PCE inflation in 2017 moved down somewhat from June, and the distributions for both measures in 2018 shifted down slightly. Most participants indicated that the soft readings on inflation so far this year were a factor contributing to the revisions in their inflation forecasts.

Figure 3.C. Distribution of participants' projections for PCE inflation, 2017-20 and over the longer run*

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Figure 3.D. Distribution of participants' projections for core PCE inflation, 2017-20*

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Appropriate Monetary Policy
Figure 3.E provides the distribution of participants' judgments regarding the appropriate target or midpoint of the target range for the federal funds rate at the end of each year from 2017 to 2020 and over the longer run. The distributions for 2017 and 2018 became somewhat less dispersed compared with those in June. Even though the range of the distribution in 2019 was narrower than in June, other measures of dispersion were roughly unchanged. The median projections of the federal funds rate continued to show gradual increases, with the median assessment for 2017 standing at 1.38 percent, consistent with three 25 basis point increases this year. Thereafter, the medians of the projections were 2.13 percent at the end of 2018, 2.69 percent at the end of 2019, and 2.88 percent at the end of 2020. Compared with their projections prepared for the June SEP, some participants reduced their projection for the federal funds rate in the longer run; the median declined 0.25 percentage point, to 2.75 percent.

Figure 3.E. Distribution of participants' judgments of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate, 2017-20 and over the longer run*

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In discussing their September projections, many participants again expressed the view that the appropriate upward trajectory of the federal funds rate over the next few years would likely be gradual. That anticipated pace reflected a few factors, including a neutral real interest rate that was currently low and was expected to move up only slowly as well as a gradual return of inflation to the Committee's 2 percent objective. Some participants judged that a slightly lower path of the federal funds rate than in their previous projections would likely be appropriate, with a few citing a slower rate of progress toward the Committee's 2 percent inflation objective than previously expected or reduced prospects for fiscal stimulus. In their discussions of appropriate monetary policy, some of the participants mentioned their assumptions for the Committee's reinvestment policy; all of those who did so anticipated that the Committee would begin its program of balance sheet normalization, described in the Addendum to the Policy Normalization Principles and Plans released in June, before the end of this year.

Uncertainty and Risks
The future outcomes of economic variables are subject to considerable uncertainty. In assessing the path of monetary policy that, in their view, is likely to be most appropriate, FOMC participants take account of the range of possible economic outcomes, the likelihood of those outcomes, and the potential benefits and costs should they occur. Table 2 provides one measure of forecast uncertainty for the change in real GDP, the unemployment rate, and total consumer price inflation--the root mean squared error (RMSE) from forecast errors of various private and government projections made over the past 20 years. This measure of forecast uncertainty is incorporated graphically in the top panels of figures 4.A, 4.B, and 4.C, which display "fan charts" plotting the median SEP projections for the three variables surrounded by symmetric confidence intervals derived from the RMSEs presented in table 2. The width of the confidence interval for each variable at a given point is a measure of forecast uncertainty at that horizon. If the degree of uncertainty attending these projections is similar to the typical magnitude of past forecast errors and the risks around the projections are broadly balanced, future outcomes of these variables would have about a 70 percent probability of occurring within these confidence intervals. For all three variables, this measure of forecast uncertainty is substantial and generally increases as the forecast horizon lengthens.

Table 2. Average historical projection error ranges

Percentage points

Variable	2017	2018	2019	2020
Change in real GDP1	±1.2	±1.9	±2.0	±2.1
Unemployment rate1	±0.3	±1.1	±1.6	±2.0
Total consumer prices2	±0.8	±1.1	±1.2	±1.1
Short-term interest rates3	±0.5	±1.7	±2.3	±2.7

Figure 4.A. Uncertainty and risks in projections of GDP growth*

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Figure 4.B. Uncertainty and risks in projections of the unemployment rate*

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Figure 4.C. Uncertainty and risks in projections of PCE inflation*

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FOMC participants may judge that the width of the historical fan charts shown in figures 4.A through 4.C does not adequately capture their current assessments of the degree of uncertainty that surrounds their economic projections. Participants' assessments of the current level of uncertainty surrounding their economic projections are shown in the bottom-left panels of figures 4.A, 4.B, and 4.C. All or nearly all participants viewed the degree of uncertainty attached to their economic projections about GDP growth, the unemployment rate, and inflation as broadly similar to the average of the past 20 years, and all participants saw the degree of uncertainty as unchanged from June.⁴ In their discussion of the uncertainty attached to their current projections, a few participants judged that near-term uncertainty for economic activity and inflation had increased as a result of the effects of Hurricanes Harvey and Irma but commented that their assessment of medium-term prospects was unaffected.

The fan charts, which are constructed so as to be symmetric around the median projections, also may not fully reflect participants' current assessments of the balance of risks to their economic projections. Participants' assessments of the balance of risks to their economic projections are shown in the bottom-right panels of figures 4.A, 4.B, and 4.C. As in June, most participants judged the risks to their projections of real GDP growth, the unemployment rate, headline inflation, and core inflation as broadly balanced--in other words, as broadly consistent with a symmetric fan chart. One fewer participant than in June judged the risks to GDP growth as weighted to the upside, and one fewer participant judged the risks to the unemployment rate as weighted to the downside. Also, one fewer participant judged the risks to inflation to be weighted to the upside, and one more viewed the risks as weighted to the downside.

Participants' assessments of the future path of the federal funds rate consistent with appropriate policy are also subject to considerable uncertainty, reflecting in part uncertainty about the evolution of GDP growth, the unemployment rate, and inflation over time. The final line in table 2 shows the RMSEs for forecasts of short-term interest rates. These RMSEs are not strictly consistent with the SEP projections for the federal funds rate, in part because the SEP projections are not forecasts of the most likely outcomes but rather reflect each participant's individual assessment of appropriate monetary policy. However, the associated confidence intervals provide a sense of the likely uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables and additional adjustments to monetary policy that may be appropriate to offset the effects of shocks to the economy. To illustrate the uncertainty regarding the appropriate path for monetary policy, figure 5 shows a fan chart plotting the median SEP projections for the federal funds rate surrounded by confidence intervals derived from the results presented in table 2. As with the macroeconomic variables, forecast uncertainty is substantial and increases at longer horizons.

Figure 5. Uncertainty in projections of the federal funds rate*

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