Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants saw the information received over the intermeeting period as suggesting that economic activity had been expanding moderately. Household spending and business fixed investment increased at solid rates in recent months, and the housing sector improved further. However, net exports remained soft. Participants noted that the pace of job gains slowed while the unemployment rate held steady; nonetheless, a range of labor market indicators, on balance, suggested that underutilization of labor resources had diminished since early this year. With private domestic final demand expanding at a solid pace, participants generally viewed the incoming data as confirming their assessment that economic activity would continue to expand at a moderate rate, leading to further improvement in labor market conditions. However, some participants were concerned that the recent slowdown in employment growth might prove more than temporary, and that improvement in labor market conditions might not continue. Most participants saw the downside risks arising from economic and financial developments abroad as having diminished and judged the risks to the outlook for domestic economic activity and the labor market to be nearly balanced. A few participants, though, noted that downside risks from abroad were still significant. Inflation continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations remained stable. Participants generally anticipated that inflation would rise gradually toward 2 percent as the labor market improved further and the transitory effects of earlier declines in energy and import prices dissipated.
Notwithstanding the disappointing retail sales data in September, participants were encouraged by the solid pace of consumption growth in the third quarter and generally expected consumer spending to rise moderately going forward. Gains in employment and income, low gasoline prices, and a high level of consumer confidence were viewed as factors that should support consumer spending. The available reports from District contacts in the retail and auto industries indicated solid gains in consumer spending, and contacts were optimistic about the near-term outlook.
Participants generally viewed the housing sector as continuing to recover, although a couple of participants noted that the pace of recovery was slow. Contacts in a number of Districts were upbeat about the sector, citing rising home prices and a healthy pace of construction and sales.
Participants noted that business fixed investment appeared to be increasing at a solid rate despite the sharp contraction in energy-related investment. Nonresidential construction was reported to be expanding in a number of regions. A large decline in inventory investment was expected to reduce the pace of GDP growth in the third quarter, but participants saw further outsized declines in inventory accumulation as unlikely. Participants expected net exports to continue to subtract from GDP growth in the second half of the year, reflecting weak foreign activity as well as the earlier appreciation of the dollar. However, solid underlying momentum in private domestic demand was anticipated to support economic growth going forward.
Manufacturing activity had slowed somewhat over the intermeeting period in a number of regions, importantly reflecting the weakness in exports, although the auto industry remained a bright spot. Weakness in commodity prices also continued to weigh on activity in the energy and agricultural sectors. Moreover, industry contacts remained pessimistic about the outlook for the energy sector. The substantial global supply of crude oil seemed likely to weigh on energy prices for some time, contributing to an increase in restructurings and bankruptcies in this sector. In contrast, service-sector reports were mostly positive.
Although employment growth slowed and the unemployment rate held steady in September, participants agreed that underutilization of labor resources had been reduced since earlier in the year. A number of participants expressed the view that further progress would be necessary before labor market conditions were fully consistent with maximum employment, while some others judged that there was little or no remaining underutilization of labor resources. Several participants observed that the recent employment reports had increased the uncertainty about the outlook for the labor market. They discussed whether the slowdown in job gains was merely transitory or indicative of a more persistent slowdown in which labor market conditions might no longer improve. Some other indicators, such as the labor force participation rate and data on job openings, quits, and hiring, had also been softer. Other participants viewed a broad range of recent labor market data as indicating a further reduction in slack and stressed the importance of assessing the cumulative improvement in the labor market since early in the year, which had been significant. Moreover, several participants indicated that they viewed the pace of monthly job gains in September as still above the rate consistent with stable or declining labor market slack, and a few participants interpreted slower increases in payrolls as evidence that labor markets had tightened.
The incoming information on wages and labor compensation, including recent data on average hourly earnings of employees, suggested that the pace of wage gains remained subdued. A number of participants cited staff analysis indicating that the modest pace of labor compensation growth in recent years may have reflected slower trend productivity growth that offset the upward pressure on wages from the narrowing of labor market slack. However, other participants noted that the continued subdued trend in wages was evidence of an absence of upward pressure on inflation from the current level of resource utilization. A number of participants reported that some of their business contacts were experiencing increasing challenges in hiring, resulting in upward pressure on wages in various occupations and in some geographic areas.
Participants discussed how recent economic developments influenced their expectations for reaching the FOMC's 2 percent inflation objective over the medium term. Total PCE price inflation, as measured on a 12-month basis, continued to run below the Committee's longer-run objective. Core PCE inflation also remained low, but some other measures of inflation, such as the trimmed mean PCE and trimmed mean CPI measures, continued to run at higher levels than core PCE inflation and had recently moved up modestly. Moreover, a few participants noted that the September CPI data appeared consistent with some firming in inflation. Surveys continued to suggest that longer-run inflation expectations remained stable. Participants still expected that the downward pressure on inflation from the previous declines in energy prices and the effects of past dollar appreciation would prove temporary. Several participants, however, cited downside risks to inflation, pointing, for example, to declines in market-based measures of inflation compensation. Nonetheless, participants generally continued to anticipate that, with appropriate monetary policy, inflation would move toward the Committee's objective over the medium term, reflecting the anticipated tightening of product and labor markets, the waning of downward pressures from energy and import prices, and stable inflation expectations.
Participants also discussed a range of topics related to financial market developments and financial stability. They noted that volatility in global financial markets had abated since the previous FOMC meeting, with equity prices in the United States largely retracing the declines experienced late in the summer. The U.S. financial system appeared to have weathered the turbulence in global financial markets without any sign of systemic stress. Participants commented on issues related to financial stability monitoring and the use of macroprudential tools, the assessment of valuation risks in leveraged loan and real estate markets, the widening of credit spreads on corporate bonds, and potential risks to financial stability stemming from interest rates remaining low for a prolonged period in an environment of a low neutral (or equilibrium) real rate. In addition, it was noted that Puerto Rico continued to face significant challenges servicing its debts, although the associated systemic risks for U.S. financial markets were likely to be minimal.
During their discussion of economic conditions and monetary policy, participants focused on a number of issues associated with the timing and pace of policy normalization. Some participants thought that the conditions for beginning the policy normalization process had already been met. Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting. Nonetheless, they emphasized that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period. Some others, however, judged it unlikely that the information available by the December meeting would warrant raising the target range for the federal funds rate at that meeting.
A number of participants pointed to various reasons why the Committee should avoid a delay in policy firming. One concern was that such a delay, if the reasons were not well understood by market participants, could increase uncertainty in financial markets and unduly magnify the perceived importance of the beginning of the policy normalization process. Another concern mentioned was the increasing risk of a buildup of financial imbalances after a prolonged period of very low interest rates. It was also noted that a decision to defer policy firming could be interpreted as signaling lack of confidence in the strength of the U.S. economy or erode the Committee's credibility. Some participants emphasized that progress toward the Committee's objectives should be assessed in light of the cumulative gains made to date without placing excessive weight on month-to-month changes in incoming data.
Several participants indicated that, despite lessening concerns about the implications of recent global economic and financial developments for domestic economic activity and inflation, appreciable downside risks to the outlook remained. They were concerned about a potential loss of momentum in the economy and the associated possibility that inflation might fail to increase as expected. Such concerns might suggest that the initiation of the normalization process may not yet be warranted. They also noted uncertainty about whether economic growth was robust enough to withstand potential adverse shocks, given the limited ability of monetary policy to offset such shocks when the federal funds rate is near its effective lower bound, and concern that the beginning of policy normalization might be associated with an unwarranted tightening of financial conditions. They believed that in these circumstances, risk-management considerations called for a cautious approach. They judged it appropriate to wait for additional information providing evidence of further improvement in the labor market and increasing their confidence that inflation was on a path to return to 2 percent over the medium term before raising the target range for the federal funds rate. In addition, a couple of participants cited concerns that a premature tightening might damage the credibility of the Committee's inflation objective if inflation stayed below 2 percent for a prolonged period.
Several participants indicated that, in the current low interest rate environment, it would be prudent for the Committee to consider options for providing additional monetary policy accommodation if the outlook for economic activity were to weaken to a degree that seemed likely to undermine continued progress in labor market conditions and impede the movement of inflation back to the Committee's 2 percent objective over the medium term. It was also noted that the Committee would need to reformulate its communications regarding the near-term outlook for monetary policy if the economic outlook weakened significantly.
During their discussion of the likely path for the federal funds rate after the time of the first increase in the target range, participants generally agreed that it would probably be appropriate to remove policy accommodation gradually. Participants also indicated that the expected path of policy, rather than the timing of the initial increase, would be the more important influence on financial conditions and thus on the outlook for the economy and inflation, and they noted the importance of underscoring this view at the time of liftoff. It was noted that beginning the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow. It was also emphasized that, while participants' most recent economic projections suggested that a gradual increase in the target range for the federal funds rate will likely be appropriate to support progress toward the Committee's dual objectives, monetary policy adjustments ultimately would be dependent on economic and financial developments. These adjustments thus could be either more or less gradual than the Committee currently anticipates, responding to the Committee's assessment of the implications of incoming information for the medium-run outlook.