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| Janet Yellen |
Although real GDP declined in the first quarter, this decline appears to have resulted mainly from transitory factors. Private domestic final demand—that is, spending by domestic households and businesses—continued to expand in the first quarter, and the limited set of indicators of spending and production in the second quarter have picked up. The Committee thus believes that economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter. Overall, the Committee continues to see sufficient underlying strength in the economy to support ongoing improvement in the labor market.
Inflation has continued to run below the Committee’s 2 percent objective, and the Committee remains mindful that inflation running persistently below its objective could pose risks to economic performance. Given that longer-term inflation expectations appear to be well anchored, and in light of the ongoing recovery in the United States and in many economies around the world, the Committee continues to expect inflation to move gradually back toward its objective. The Committee will continue to assess incoming data carefully to ensure that policy is consistent with attaining the FOMC’s longer-run objectives of maximum employment and inflation of 2 percent.
This outlook is reflected in the individual economic projections submitted in conjunction with this meeting by the FOMC participants. As always, each participant’s projections are conditioned on his or her own views of appropriate monetary policy. The central tendency of the unemployment rate projections is slightly lower than in the March projections and now stands at 6.0 to 6.1 percent at the end of this year. From there, Committee participants generally see the unemployment rate declining to its longer-run normal level by the end of 2016.
The central tendency of the projections for real GDP growth is 2.1 to 2.3 percent for 2014, down notably from the March projections, largely because of the unexpected contraction in the first quarter. Over the next two years, the projections for real GDP growth remain somewhat above the estimates of longer-run normal growth. Finally, FOMC participants continue to see inflation moving only gradually back toward 2 percent over time as the economy expands. The central tendency of the inflation projections is 1.5 to 1.7 percent in 2014, rising to 1.6 to 2.0 percent in 2016.
As I noted at the outset, the Committee decided today to make another measured reduction in the pace of asset purchases. Starting next month, we will be purchasing $35 billion of securities per month, down $10 billion per month from our current rate. Even after today’s action takes effect, we will continue to expand our holdings of longer-term securities, and we will also continue to roll over maturing Treasury securities and reinvest principal payments from the FOMC’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These sizable and still-increasing holdings will continue to put downward pressure on longer-term interest rates, support mortgage markets, and make financial conditions more accommodative, helping to support job creation and a return of inflation to the Committee’s objective.
Today’s announced reduction in the pace of asset purchases reflects the Committee’s expectation that progress toward its economic objectives will continue. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor markets and inflation moving back over time toward its longer-run objective, the Committee will likely continue to reduce the pace of asset purchases in measured steps at future meetings. However, as I have emphasized before, purchases are not on a preset course, and the Committee’s decisions about the pace of purchases remain contingent on its outlook for jobs and inflation as well as its assessment of the likely efficacy and costs of such purchases.
Let me now turn to the framework we will be applying as we consider interest rate policy. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.
This broad assessment will not hinge on any one or two indicators, but will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment of these factors, the Committee anticipates that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and longer-term inflation expectations remain well anchored. Further, once we begin to remove policy accommodation, it is the Committee’s current assessment that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
This guidance is consistent with the paths for appropriate policy as reported in the participants’ projections, which show the federal funds rate for most participants remaining well below longer-run normal values at the end of 2016. Although FOMC participants provide a number of explanations for the federal funds rate target remaining below its longer-run normal level, many cite the residual effects of the financial crisis. These include restrained household spending, reduced credit availability, and diminished expectations for future growth in output and incomes, consistent with the view that the potential growth rate of the economy may be lower for some time.
Let me reiterate, however, that the Committee’s expectation for the path of the federal funds rate target is contingent on the economic outlook. If the economy proves to be stronger than anticipated by the Committee, resulting in a more rapid convergence of employment and inflation to the FOMC’s objectives, then increases in the federal funds rate target are likely to occur sooner and to be more rapid than currently envisaged. Conversely, if economic performance disappoints, resulting in larger and more persistent deviations from the Committee’s objectives, then increases in the federal funds rate target are likely to take place later and to be more gradual.
Before taking your questions, I’d like to provide an update on the Committee’s ongoing discussions on the mechanics of normalizing the stance and conduct of monetary policy. To be clear, these discussions are in no way intended to signal any imminent change in the stance of monetary policy. Rather, they represent prudent planning on the part of the Committee and reflect the Committee’s intention to communicate its plans to the public well before the first steps in normalizing policy become appropriate.
The Committee is confident that it has the tools it needs to raise short-term interest rates when it becomes appropriate to do so and to control the level of short-term interest rates thereafter, even though the Federal Reserve will continue to have a very large balance sheet for some time. The Committee’s recent discussions have centered on the appropriate mix of tools to employ during the normalization process and the associated implications for the degree of control over short-term interest rates, the functioning of the federal funds market, and the extent to which the Federal Reserve transacts with financial institutions outside the banking sector. The Committee is constructively working through the many issues related to normalization and will continue its discussions in upcoming meetings, with the expectation of providing additional details later this year.
