positioned to weather future adverse shocks. However, the staff viewed the risks around the projection for the unemployment rate as roughly balanced, with the risk of a higher unemployment rate resulting from adverse developments roughly countered by the possibility that the unemployment rate could continue to fall more than expected, as it had in recent years. The staff did not see the uncertainty around its outlook for inflation as unusually high, and the risks to that outlook were viewed as broadly balanced.
Participants’ Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, the meeting participants–5 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participated in the deliberations–submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2016 and over the longer run, under 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 economic projections and policy assessments are described in the Summary of Economic Projections (SEP), which is attached as 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 suggesting that the economy was expanding at a moderate pace. They generally indicated that the broad contours of their outlook for real activity, the labor market, and inflation had not changed materially since their October meeting, but most expressed greater confidence in the outlook and saw the risks associated with their forecasts of real GDP growth and the unemployment rate as more nearly balanced than earlier in the year. Almost all participants continued to project that the rate of growth of economic activity would strengthen in coming years, and all anticipated that the unemployment rate would gradually decline toward levels consistent with their current assessments of its longer-run normal value. The projected improvement in economic activity was expected to be supported by highly accommodative monetary policy, diminished fiscal policy restraint, and a pickup in global economic growth, as well as a further easing of credit conditions and continued improvements in household balance sheets. Inflation remained below the Committee’s longer-run objective over the intermeeting period. Nevertheless, participants still anticipated that with longer-run inflation expectations stable and economic activity picking up, inflation would move back toward its objective over the medium run. But they noted that inflation persistently below the Committee’s objective would pose risks to economic performance and so saw a need to monitor inflation developments carefully.
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Consumer spending appeared to be strengthening, with solid gains in retail sales in recent months and a rebound in motor vehicle sales in November. On balance, retail contacts reportedly were fairly optimistic about holiday sales. Participants cited a number of factors that likely contributed to the recent pickup in spending, including the waning effects of the payroll tax increase that had trimmed disposable income earlier in the year, the drop in energy costs, and the recent improvement in consumer sentiment. More broadly, spending was being supported by gains in household wealth associated with rising house prices and equity values, the still-low level of interest rates, and the progress that households have made in reducing debt and strengthening their balance sheets. These favorable trends were generally anticipated to continue and to be accompanied by stronger real disposable income as labor market conditions improve and inflation remains low.
Activity in the housing sector slowed in recent months. Some participants noted that the increase in mortgage interest rates since the spring was having a greater effect on that sector than they had anticipated earlier. Despite the recent softening, participants discussed a number of factors that should support a continued recovery in housing going forward. These included expectations that mortgage interest rates would remain relatively favorable, that rising home values would boost household wealth and further reduce the number of borrowers with underwater mortgages, that consumer incomes and confidence would continue to rise as employment expanded, and that a pickup in household formation would support the demand for housing.
Business investment appeared to be advancing at a moderate rate. A number of the fundamental determinants of business investment were positive: Business balance sheets remained in good shape, cash flow was ample, and input costs were subdued. Business contacts in a number of Districts were reportedly somewhat more confident about the outlook than they had been earlier in the fall, but a couple of participants reported that their contacts continued to focus on investments intended to reduce costs and were still cautious regarding investment to expand capacity, or that concerns about health care costs were holding back hiring. In the manufacturing sector, production appeared to be increasing at a solid rate according to both national and most of the regional surveys of activity, and the available indexes of future activity continued to suggest optimism among firms. Renewed export demand and a buildup in auto inventories, which may be reversed in 2014, were cited as contributing to the recent gains in production. Participants heard positive reports from their contacts in the technology, rail, freight, and airline industries, and activity in the energy sector remained strong. In agriculture,