Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2015 through 2018 and over the longer run, conditional on each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate 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. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as indicating that economic activity was expanding moderately. Although net exports remained soft, household spending and business fixed investment were increasing moderately, and the housing sector recovered further. The labor market continued to improve, with solid job gains and declining unemployment, and labor market indicators showed that underutilization of labor resources had diminished since early in the year.
Growth in real GDP over the first half of the year was stronger than participants expected when they prepared their June forecasts, and the unemployment rate declined somewhat more than anticipated. Participants made only small adjustments to their projections for economic activity over the medium term. They continued to anticipate that, with appropriate policy accommodation, the pace of expansion of real activity would remain somewhat above its longer-run rate over the next two years and lead to further improvement in labor market conditions. Most continued to see the risks to real activity and unemployment as nearly balanced, but many acknowledged that recent global economic and financial developments may have increased the downside risks to economic activity somewhat.
Inflation continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey measures of longer-term inflation expectations remained stable. Participants anticipated that recent global developments would likely put further downward pressure on inflation in the near term; compared with their previous forecasts, more now saw the risks to inflation as tilted to the downside. But participants still expected that, as the labor market continued to improve and the transitory effects of declines in energy and non-oil import prices dissipated, inflation would rise gradually toward 2 percent over the medium term.
Consumer spending was rising at a solid rate after a modest increase in the first quarter. Participants noted that ongoing gains in employment and real income were providing support for the rise in spending, and this support was expected to continue going forward. Household credit performance was also favorable, with delinquency rates on credit cards and auto loans low. The available reports from District contacts in the retail and auto industries confirmed the recent solid gains in consumer spending. Contacts were generally optimistic about the outlook, although retail sales appeared to be softening in a few areas where economic activity was adversely affected by declines in the energy sector and the increase in the foreign exchange value of the dollar.
Housing activity was improving, with sales and new construction trending higher. Solid gains in employment and favorable mortgage rates were anticipated to continue to underpin the recovery in housing. Contacts in a number of Districts were upbeat about prospects for the sector, citing strengthening sales, rising home prices, an upturn in household formations, and reports that buyers had accelerated purchases in anticipation of the possibility that mortgage rates might move higher in the near term. Multifamily construction was particularly strong in a couple of Districts, but in another a shortage of lots was constraining builders' ability to meet strong demand for new single-family homes.
The information on business spending from District contacts was mixed. Nonresidential construction was reported to be expanding in a number of regions. In manufacturing, the auto industry remained a bright spot, but the appreciation of the dollar was still restraining production of goods for export. Optimism remained relatively high according to some District contacts, although a few regional activity surveys noted some caution related to uncertainty about recent economic developments abroad. The weakness in commodity prices and the appreciation of the dollar also continued to weigh on activity in the energy and agricultural sectors. Moreover, the outlook for the energy sector appeared to be worsening. The substantial global supply of crude oil seemed likely to maintain downward pressure on energy prices for some time, leading to a deterioration in credit conditions for some U.S. producers and a further reduction in their capital outlays.
Participants agreed that labor market conditions had improved considerably since earlier in the year. Payroll employment had been increasing steadily. Underutilization of labor resources had diminished along a number of dimensions: The unemployment rate had fallen to a level close to most participants' estimates of its longer-run normal rate, and the numbers of discouraged workers and those employed part time for economic reasons had moved lower. With the cumulative improvement in labor market conditions, most participants thought that the underutilization of labor resources had been substantially reduced, and a few of them expressed the view that underutilization had been eliminated. But some others believed that labor market slack in addition to that measured by the unemployment rate remained and that further progress was possible before labor market conditions were fully consistent with the Committee's objective of maximum employment. They pointed out that, even recognizing the downward trend in labor force participation, the level of the participation rate, particularly for prime-age adults, remained depressed; similarly, the number of workers on part-time schedules for economic reasons was still elevated. A number of participants noted that eliminating slack along such broader dimensions might require a temporary decline in the unemployment rate below its longer-run normal level, and that this development could speed the return of inflation to 2 percent.
The incoming information on wages and labor compensation, including an especially low reading on the employment cost index for the second quarter, showed no broad-based acceleration. To some, the continued subdued trend in wages was evidence of an absence of upward pressure on inflation from current levels of labor utilization. Several others, however, noted that weak productivity growth and low price inflation might be contributing to modest wage increases. A number of participants reported that some of their business contacts were experiencing labor shortages in various occupations and geographic areas resulting in upward pressure on wages, with a few indicating that the pickup in wages had become more widespread.
Recent readings on headline consumer price inflation reflected only small increases in core inflation and renewed weakness in consumer energy prices. As a result, the
12-month changes in both the total and core PCE price indexes for August were expected to still be well below the Committee's 2 percent objective. Participants continued to judge that a significant portion of the shortfall was the result of the transitory effects of declines in prices of oil and non-energy commodities. A few participants pointed out that since January when the steep drop in energy prices ended, core PCE prices had risen at an annual rate of 1.7 percent, closer to the Committee's objective, despite the continued decline in prices of non-energy imports. Still, almost all participants anticipated that inflation would continue to run below 2 percent in the near term, particularly in light of the further decline in oil prices and further appreciation of the dollar over the intermeeting period. Participants also discussed various measures of expectations for inflation over the longer run. Surveys continued to show stable longer-run inflation expectations, and most participants continued to anticipate that longer-run inflation expectations would remain well anchored. A few participants expressed some concern about the decline in market-based measures of inflation compensation. However, it was noted that the decline seemed to be related to the further drop in oil prices or may importantly reflect shifts in risk and liquidity premiums, and thus may not signal additional broad and persistent downward price pressures.
Participants discussed the potential implications of recent economic and financial developments abroad for U.S. economic activity and inflation. A material slowdown in economic growth in China and potential adverse spillovers to other economies were likely to depress U.S. net exports to some extent. In addition, concerns associated with developments in China and other emerging market economies had contributed to a further appreciation of the dollar and declines in prices of oil and other commodities, which were likely to hold down U.S. consumer price inflation in the near term. In the United States, equity prices fell, on balance, amid significant volatility, and risk spreads for businesses widened. Many participants judged that the effects of these developments on domestic economic activity were likely to be small, but they acknowledged the risk that they might restrain U.S. economic growth somewhat. In particular, the appreciation of the dollar since mid-2014 was still a substantial drag on net exports, and the further rise in the dollar over the intermeeting period could augment the restraint on U.S. net exports. Some participants commented that the recent decline in equity prices needed to be viewed in the context of overall valuation levels, which they saw as relatively high, and a couple noted that volatility had begun to subside.
During their discussion of economic conditions and monetary policy, participants indicated that they did not see the changes in asset prices during the intermeeting period as bearing significantly on their policy choice except insofar as they affected the outlook for achieving the Committee's macroeconomic objectives and the risks associated with that outlook. Many of them saw the likely effects of recent developments on the path of economic activity and inflation as small or transitory. Most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year. However, some participants judged that the downside risks to the outlook for economic growth and inflation had increased. In their view, although the time for policy normalization might be near, it would be appropriate to wait for information, including evidence of further improvement in the labor market, confirming that the outlook for economic growth had not deteriorated significantly and that inflation was still on a path to return to 2 percent over the medium term. A few mentioned that a pickup in wage increases could bolster their confidence that resource utilization had tightened sufficiently to help move inflation toward the Committee's objective, but they did not view an acceleration in wages as a necessary condition for gaining such confidence.
Participants weighed a number of risks associated with the timing of policy firming. Some participants were concerned that the downside risks to inflation could be realized if the target range for the federal funds rate was increased before it was clear that economic growth would remain at an above-trend pace and downward pressures on inflation had abated. They also worried that such a premature tightening might erode the credibility of the Committee's inflation objective if inflation stayed at a rate below 2 percent for a prolonged period. It was noted that monetary policy was better positioned to respond effectively to unanticipated upside inflation surprises than to persistent below-objective inflation, particularly when the federal funds rate was still near its effective lower bound. Such considerations also argued for increasing the target range for the federal funds rate gradually after policy normalization was under way. Some other participants, however, expressed concerns about delaying the start of normalizing the target range for the federal funds rate much longer. For example, a significant delay risked an undesired buildup of inflationary pressures or economic and financial imbalances that would be costly to unwind and that eventually could have adverse consequences for economic growth. In addition, a prompt decision to firm policy could provide a signal of confidence in the strength of the U.S. economy that might spur rather than restrain economic activity. These participants preferred to begin policy firming soon, with most of them expecting that beginning the process before long would allow the target range for the federal funds rate to be increased gradually.