At our meeting that concluded earlier today, my colleagues and I on the Federal Open Market Committee decided to maintain the target range for the federal funds rate at 1 to 1.25 percent. This accommodative policy should support some further strengthening in the job market and return to 2 percent inflation consistent with our statutory objectives.
We also decided that in October, we will begin the balance sheet normalization program that we outlined in June. This program will reduce our securities holdings in a gradual and predictable manner. I'll have more to say about these decisions shortly, but first I'll review recent economic developments in the outlook. As we expected, and smoothing through some variation from quarter to quarter, economic activity has been rising moderately so far this year.
Household spending has been supported by ongoing strength in the job market. Business investment has picked up, and exports have shown greater strength this year, in part reflecting improved economic conditions abroad. Overall, we expect that the economy will continue to expand at a moderate pace over the next few years.
In the third quarter, however, economic growth will be held down by the severe disruptions caused by hurricanes Harvey, Irma and Maria As activity resumes and rebuilding gets under way, growth likely will bounce back. Based on past experience, these effects are likely to materially alter the course of the national economy beyond the next couple of quarters. Of course, for the families and communities that have been devastated by the storms, recovery will take time, and on behalf of the federal reserve, let me express my sympathy for all those who have suffered losses.
In the labor market, job gains averaged 185,000 per month over the three months ending in August, a solid rate of growth that remained well above estimates of the pace necessary to absorb new entrants to the labor force. We know from some timely indicators, such as initial claims for unemployment insurance, that the hurricane severely disrupted the labor market in the affected areas, and payroll employment may be substantially affected in September. However, such effects should unwind relatively quickly.
Meanwhile, the unemployment rate has stayed low in recent months, and at 4.4 percent in August was modestly below the median of FOMC participants' estimates of its longer-run normal level. Participation in the labor force has changed little, both recently and over the past four years. Given the underlying downward trend in participation stemming largely from the aging of the U.S. population, a relatively steady participation rate is a further sign of improving conditions in the labor market. We expect that the job market will strengthen somewhat further.
Turning to inflation, the 12-month change in the price index for personal consumption expenditures was 1.4 percent in July, down noticeably from earlier in the year. Core inflation, which excludes the volatile food and energy categories, has also moved lower. For quite some time, inflation has been running below the committee's 2 percent longer-run objective. However, we believe this year's shortfall in inflation primarily reflects developments that are largely unrelated to broader economic conditions. For example, one-off reductions earlier this year in certain categories of prices such as wireless telephone services are currently holding down inflation, but these effects should be transitory.
Such developments are not uncommon, and as long as inflation expectations remain reasonably well anchored, are not of great concern from a policy perspective because their effects fade away. Similarly, the recent hurricane-related increases in gasoline prices will likely boost inflation, but only temporarily.
More broadly, with employment near assessments of the maximum sustainable level and the labor market continuing to strengthen, the committee continues to expect inflation to move up and stabilize around 2 percent over the next couple of years in line with our longer run objective.
Nonetheless, our understanding of the forces driving inflation isn't perfect. And in light of the unexpected lower inflation readings this year, the Committee is monitoring inflation
As always, the Committee is prepared to adjust monetary policy as needed to achieve its inflation and employment objectives over the medium term. Let me turn to the economic projections that Committee participants submitted for this meeting, which now extend through 2020.
As always, participants conditioned their projections on their own individual views of appropriate monetary policy which in turn, depend on each participant's assessments of the many factors that shaped the outlook.
The median projection for growth of inflation-adjusted gross domestic, or real GDP, is 2.4 percent this year and about 2 percent in 2018 and 2019. By 2020, the median growth projection moderates to 1.8 percent, in line with its estimated longer-run rate. The median projection for the unemployment rate stands at 4.3 percent in the fourth quarter of this year and runs a little above 4 percent over the next three years, modestly below the median estimate of its longer run normal rate.
Finally, the median inflation projection is 1.6 percent this year, 1.9 percent next year and 2 percent in 2019 and 2020. Compared with the projections made in June, real GDP growth is a touch stronger this year, and inflation — particularly core inflation — is slightly softer this year and next. Otherwise, the projections are little changed from June.
Returning to monetary policy, although the committee decided at this meeting to maintain its target for the federal funds rate, we continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2 percent longer-run objective.
That expectation is based on a review that the federal funds rate remains somewhat below its neutral level. That is, the level that is neither expansionary nor contractionary and keeps the economy operating on an even keel.
Because the neutral rate currently appears to be quite low by historical standards, the federal funds rate would not have to rise much further to get to a neutral policy stance. But because we also expect the neutral level of federal funds rate to rise somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion.
Even so, the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades. This view is consistent with participant's projections of appropriate monetary policy.
The median projection for the federal funds rate is 1.4 percent at the end of this year, 2.1 percent at the end of next year, 2.7 percent at the end of 2019, and 2.9 percent in 2020. Compared with the projections made in June, the median path for the federal funds rate is essentially unchanged, although the median estimate of the longer run normal value edged down to 2.8 percent.
As always, the economic outlook is highly uncertain and participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to their economic outlooks and views of the risks of their outlooks. Policy is not on a preset course.
As I noted, the Committee announced today that it will begin its balance sheet normalization program in October. This program, which was described in the June addendum to our policy normalization principles and plans, will gradually decrease our reinvestments of proceeds for maturing treasury securities and principal payments for agency securities.
As a result, our balance sheet will decline gradually and predictably. For October through December, the decline in our securities holdings will be capped at $6 billion per month for treasuries and $4 billions per month for agencies.
These caps will gradually rise over the course of the following year to maximums of $30 billion per month for treasuries and $20 billion per month for agency securities, and will remain in place through the process of normalizing the size of our balance sheet.
By limiting the volume of securities that private investors will have to absorb as we reduce our holdings, the caps should guard against the outsized moves in interest rates and other potential market strains. Finally, as we have noted previously, changing the target range for the federal funds rate is our primary means of adjusting the stance of monetary policy.
Our balance sheet is not intended to be an active tool for monetary policy in normal times. We, therefore, do not plan on making adjustments to our balance sheet normalization program. But of course, as we stated in June, the Committee would be prepared to resume reinvestments if a material deterioration in the economic outlook would warrant a sizeable reduction in the federal funds rate.