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 output growth, the unemployment rate, and inflation for each year from 2017 through 2019 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate. [The office of the president of the Federal Reserve Bank of Atlanta was vacant at the time of this FOMC meeting; the incoming president of the Federal Reserve Bank of Atlanta is scheduled to assume office on June 5, 2017. Marie Gooding, First Vice President of the Federal Reserve Bank of Atlanta, submitted economic projections.] The longer-run projections represented 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. [One participant did not submit longer-run projections for real output growth, the unemployment rate, or the federal funds rate.] These projections and policy assessments are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that economic activity had continued to expand at a moderate pace. Job gains had remained solid and the unemployment rate was little changed in recent months. Household spending had continued to rise moderately while business fixed investment appeared to have firmed somewhat. Inflation had increased in recent quarters and moved close to the Committee's 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and had continued to run somewhat below 2 percent. Market-based measures of inflation compensation had remained low; survey-based measures of inflation compensation were little changed on balance.
Participants generally saw the incoming economic information as consistent, overall, with their expectations and indicated that their views about the economic outlook had changed little since the January-February FOMC meeting. Although GDP appeared to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality. Participants continued to anticipate that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term.
Participants generally judged that risks to the economic outlook remained roughly balanced overall, although they saw some of the considerations underlying that assessment as having changed modestly. Participants continued to underscore the considerable uncertainty about the timing and nature of potential changes to fiscal policies as well as the size of the effects of such changes on economic activity. However, several participants now anticipated that meaningful fiscal stimulus would likely not begin until 2018. In view of the substantial uncertainty, about half of the participants did not incorporate explicit assumptions about fiscal policy in their projections. Nonetheless, most participants continued to view the prospect of more expansionary fiscal policies as an upside risk to their economic forecasts. At the same time, some participants and their business contacts saw downside risks to labor force and economic growth from possible changes to other government policies, such as those affecting immigration and trade. Participants generally viewed the downside risks associated with the global economic outlook, particularly those related to the economic situation in China and Europe, as having diminished over recent months. At the same time, several participants cautioned that upcoming elections in EU countries posed both near-term and longer-term risks.
Regarding the outlook for inflation, several participants noted that the apparently modest response of inflation to measures of resource slack in recent years, along with inflation expectations that appeared to have remained well anchored, limited the risk of a marked pickup in inflation as the labor market tightened further. In contrast, some other participants continued to express concern that a substantial undershooting of the longer-run normal rate of unemployment, if it was to occur, posed a significant upside risk to inflation, in part because of the possibility that the behavior of inflation could differ from that in recent decades. Participants generally agreed that it would be appropriate to continue to closely monitor inflation indicators and global economic and financial developments.
In their discussion of developments in the household sector, participants agreed that consumer spending was likely to contribute significantly to economic growth this year. Although motor vehicle sales had fallen early in the year and some other components of PCE had also declined, many participants suggested that the slowdown in consumer spending in January would likely be temporary. The slowing appeared to mainly reflect transitory factors like lower energy consumption induced by warm weather or delays in processing income tax refunds. In addition, conditions conducive to growth in consumer spending, such as a strong labor market or higher levels of household wealth, were expected to persist. A number of participants also cited buoyant consumer confidence as potentially supporting household expenditures, although some also mentioned that improved sentiment did not appear to have appreciably altered the trajectory of consumer spending so far. In the housing market, access to mortgage credit that was still restricted for some borrowers, constraints on buildable land in some regions, and rising interest rates were cited as having continued to restrain the recovery in housing.
Participants generally agreed that recent momentum in the business sector had been sustained over the intermeeting period. Many reported that manufacturing activity in their Districts had strengthened further, and reports from the service sector were positive. Business optimism remained elevated in a number of Districts. A few participants reported increased capital expenditures by businesses in their Districts, but business contacts in several other Districts said they were waiting for more clarity about government policy initiatives before implementing capital expansion plans. Investment in oil drilling, and particularly extraction from shale, was described as increasing in a couple of Districts, and demand for related production inputs was also said to be expanding. Nonetheless, slower economic growth, ample existing capacity, and modest returns in the energy sector were noted as factors that were continuing to restrain overall capital spending.
Labor market conditions had continued to improve. Monthly increases in nonfarm payroll employment averaged nearly 210,000 over the three months ending in February, the unemployment rate edged down, and the labor force participation rate ticked up. Some participants cited anecdotal evidence of a tightening of labor markets. Business contacts in many Districts reported difficulty recruiting qualified workers and indicated that they had to either offer higher wages or hire workers with lower qualifications than desired. A couple of participants reported that the ongoing mismatch between the skill requirements of available jobs and the qualifications of job applicants was a factor boosting the number of unfilled positions. Tight labor markets were said to increasingly be a factor in businesses' planning. More employers reportedly were addressing the scarcity of labor by expanding vocational programs, but contacts emphasized that, to be effective, such efforts needed to be complemented by other programs such as assistance with child care and transportation. Shortages of production crews were said to have restricted oil drilling in a couple of Districts. In contrast, several other participants cited evidence that some slack remained in the labor market, such as still-modest aggregate wage growth and the unevenness of wage gains across industries, an elevated share of employees working part time for economic reasons, or other broad measures of labor underutilization. Participants noted the continued stability of the labor force participation rate in the face of its demographically driven downward trend. A few participants interpreted that development as suggesting that slack in the labor market was minimal. A few others saw it as an indication that labor force participation could increase a bit more relative to trend and thus that some further reduction in labor market slack could occur. Most participants still expected that if economic growth stayed moderate, as they projected, the unemployment rate would remain only modestly below their estimates of the longer-run normal rate of unemployment over the next few years. Some other participants, however, anticipated a more substantial undershoot.
Participants generally viewed the information received over the intermeeting period as reinforcing their expectation that inflation would stabilize around the Committee's 2 percent objective over the medium term. The 12-month change in headline PCE prices increased from 1.7 percent in December to 1.9 percent in January, as the effects of firmer consumer energy prices were registered. Core PCE prices rose at a relatively quick pace of 0.3 percent for the month of January, although it was noted that residual seasonality might have exaggerated the increase. The Federal Reserve Bank of Dallas's 12-month trimmed mean PCE inflation rate had gradually increased over the past couple of years, reaching 1.9 percent in January. Although market-based measures of inflation compensation had remained low, they were somewhat above the levels seen last year. In addition, longer-term inflation expectations in the Michigan survey had been relatively stable since the beginning of the year, while other survey measures of inflation expectations, such as the three-year-ahead measure from the Federal Reserve Bank of New York's Survey of Consumer Expectations, had increased in recent months. Notwithstanding these developments, some participants cautioned that progress toward the Committee's inflation objective should not be overstated; they noted that inflation had been persistently below 2 percent during the current economic expansion and that core inflation on a 12-month basis was little changed in recent months at a level below 2 percent. In contrast, a few other participants commented that recent inflation data were stronger than they had expected and that they anticipated that inflation would reach the Committee's objective of 2 percent this year.
In their discussion of recent developments in financial markets, participants noted that financial conditions remained accommodative despite the rise in longer-term interest rates in recent months and continued to support the expansion of economic activity. Many participants discussed the implications of the rise in equity prices over the past few months, with several of them citing it as contributing to an easing of financial conditions. A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high-yield corporate bonds, and commercial real estate, had also risen significantly in recent months. In contrast, prices of farmland reportedly had edged lower, in part because low commodity prices continued to weigh on farm income. Still, farmland valuations were said to remain quite high as gauged by standard benchmarks such as rent-to-price ratios.
In their consideration of monetary policy, participants generally agreed that the data over the intermeeting period were broadly in line with their expectations, providing evidence of further strengthening of labor market conditions and ongoing progress toward the Committee's objective of 2 percent inflation. Participants noted that their views of the economic outlook were essentially unchanged from those of the past couple of meetings. Almost all participants saw the incoming data as consistent with an increase of 25 basis points in the target range for the federal funds rate at this meeting. They judged that, even after an increase in the target range, the stance of monetary policy would remain accommodative, supporting some additional strengthening in labor market conditions and a sustained return to 2 percent inflation.
With their views of the outlook for the economy little changed, participants generally continued to judge that a gradual pace of rate increases was likely to be appropriate to promote the Committee's objectives of maximum employment and 2 percent inflation. Participants pointed to several reasons for their assessment that a gradual removal of policy accommodation likely would be appropriate. A few noted that it could take some time for inflation to rise to 2 percent on a sustained basis, and thus monetary policy would likely need to remain accommodative for a while longer in order to support the economic conditions that would foster such an increase. Several participants remarked that risk-management considerations still argued for a gradual removal of accommodation because the proximity of the federal funds rate to the effective lower bound placed constraints on the ability of monetary policy to respond to adverse shocks. Moreover, the neutral real rate--defined as the real interest rate that is neither expansionary nor contractionary when the economy is operating at or near its potential--still appeared to be low by historical standards. Furthermore, uncertainty about current and prospective values of the neutral real rate reinforced the argument for a gradual approach to removing monetary policy accommodation over the next few years.
Participants emphasized that they stood ready to change their assessments of, and communications about, the appropriate path for the federal funds rate in response to unanticipated developments. They pointed to several risks that, if realized, could lead them to reassess their views of the appropriate policy path. These risks included the possibility of stronger spending by businesses and households as a result of improved sentiment, appreciably more expansionary fiscal policy, or a more rapid buildup of inflationary pressures than anticipated. In addition, a number of participants remarked that recent and prospective changes in financial conditions posed upside risks to their economic projections, to the extent that financial developments provided greater stimulus to spending than currently anticipated, as well as downside risks to their economic projections if, for example, financial markets were to experience a significant correction. Participants also mentioned potential developments abroad that could have adverse implications for the U.S. economy.
Nearly all participants judged that the U.S. economy was operating at or near maximum employment. In contrast, participants held different views regarding prospects for the attainment of the Committee's inflation goal. A number of participants noted that core inflation was a useful indicator of future headline inflation, and the latest reading on 12-month core inflation suggested that it could still be some time before headline inflation reached 2 percent on a sustained basis. Moreover, several participants remarked that even though inflation was currently not that far below the Committee's 2 percent objective, it was important for the Committee to remove accommodation gradually to help ensure that inflation would stabilize around that objective over the medium term. These participants emphasized that a sustained return to 2 percent inflation was particularly important in light of the persistent shortfall of inflation from its objective over the past several years. However, several other participants judged that--with the headline PCE price index rising nearly 2 percent and the core PCE index increasing close to 1-3/4 percent over the 12-month period ending in January--the Committee essentially had met its inflation goal or was poised to meet it later this year. In the view of these participants, such circumstances could warrant a faster pace of scaling back accommodation than implied by the medians of participants' assessments in the SEP.