The labor market continues to strengthen. Over the most recent three months, job gainsaveraged nearly 230,000 per month, similar to the pace experienced over the past year. Theunemployment rate was 4.9 percent in the first two months of the year, about in line with themedian of FOMC participants' estimates of its longer-run normal level. A broader measure ofunemployment that includes individuals who want and are available to work but have notactively searched recently and people who are working part time but would rather work full-timehas continued to improve. Of note, the labor force participation rate has turned up noticeablysince the fall, with more people working or actively looking for work as the prospects for findingjobs have improved. But there is still room for improvement: Involuntary part-timeemployment remains somewhat elevated, and wage growth has yet to show a sustainedpickup.
The improvement in employment conditions so far this year has occurred as economic growthappears to have picked up from the modest pace seen in the fourth quarter of last year.Household spending is expanding at a moderate rate, supported by continued job gains andincreases in inflation-adjusted incomes. In contrast, business investment has been weak, inpart reflecting further reductions in oil drilling as a result of low oil prices. Net exports alsoremain soft as a consequence of subdued foreign growth and the earlier appreciation of thedollar. Looking ahead, the Committee expects that, with gradual adjustments in the stance ofmonetary policy, economic activity will continue to expand at a moderate pace and labormarket indicators will continue to strengthen.
Ongoing economic growth and additional strengthening in labor market conditions areimportant factors underpinning the inflation outlook. Overall consumer price inflation – asmeasured by the price index for personal consumption expenditures – stepped up to 1¼percent over the 12 months ending in January, as the sharp decline in energy prices aroundthe end of 2014 dropped out of the year-over-year figures. Core inflation, which excludesenergy and food prices, has also picked up, although it remains to be seen if this firming will besustained. In particular, the earlier declines in energy prices and appreciation of the dollarcould well continue to weigh on overall consumer prices. But once these transitory influencesfade and as the labor market strengthens further, the Committee expects inflation to rise to 2percent over the next two to three years.
The Committee's inflation outlook rests importantly on its judgment that longer-run inflationexpectations remain reasonably well anchored. However, the stability of longer-run inflationexpectations cannot be taken for granted. Survey-based measures of longer-run inflationexpectations are little changed, on balance, in recent months, although some remain nearhistorically low levels. Market-based measures of inflation compensation also remain low.Movements in these indicators reflect many factors and therefore may not provide an accuratereading on changes in the inflation expectations that are most relevant for wage and pricesetting. Nonetheless, our statement continues to emphasize that, in considering future policydecisions, we will carefully monitor actual and expected progress toward our inflation goal.
This general assessment of the outlook is reflected in the individual economic projectionssubmitted for this meeting by FOMC participants. As always, each participant's projections areconditioned on his or own – his or her own view of appropriate monetary policy, which, inturn, depends on each person's assessment of the multitude of factors that shape theoutlook. Participants' projections for growth of inflation-adjusted gross domestic product orGDP are just a touch lower than the projections made in conjunction with the December FOMCmeeting. The median growth projection edges down from 2.2 percent this year to 2 percent in2018, in line with its estimated longer-run rate. The median projection for the unemploymentrate falls from 4.7 at the end of this year to 4.5 percent at the end of 2018, somewhat belowthe median assessment of the longer-run normal unemployment rate. The median path of theunemployment rate is a little lower than in December, in part reflecting a slightly lower medianestimate of the longer-run normal unemployment rate. Finally, with the transitory factorsholding down inflation expected to abate and labor market conditions anticipated tostrengthen further, the median inflation projection rises from 1.2 percent this year to 1.9percent next year and 2 percent in 2018. The median inflation projection for this year is a littlelower than in December, but thereafter the median projections are unchanged.
Since the turn of the year, concerns about global economic prospects have led to increasedfinancial market volatility and somewhat tighter financial conditions in the United States,although financial conditions have improved notably more recently. In addition, economicgrowth abroad appears to be running at a somewhat softer pace than previously expected.These unanticipated developments, however, have not resulted in material changes to theCommittee's baseline outlook. One reason for this is that market expectations for the path ofpolicy interest rates have moved down, and the accompanying decline in longer-term interestrates should help cushion any possible adverse effects on domestic economic activity. Indeed,while stock prices have fallen slightly since the December meeting and spreads of investment-grade corporate bond yields over those on comparable-maturity Treasury securities haverisen, mortgage rates and corporate borrowing costs have moved lower. Of course, theCommittee will continue to monitor these developments closely and will adjust the stance ofmonetary policy as needed to foster our goals of maximum employment and 2 percentinflation.
Returning to monetary policy, as I noted earlier, the Committee decided to maintain its targetrange for the federal funds rate. This decision partly reflects the implications for the U.S.economy of the global economic and financial developments I just mentioned. In addition,proceeding cautiously in removing policy accommodation at this time will allow us to verifythat the labor market is continuing to strengthen despite the risks from abroad. Such cautionis appropriate given that short-term interest rates are still near zero, which means thatmonetary policy has greater scope to respond to upside than to downside changes in theoutlook.
As we indicated in our statement, "the Committee expects that economic conditions will evolvein a manner that will warrant only gradual increases in the federal funds rate; the federalfunds rate is likely to remain, for some time, below levels that are expected to prevail in thelonger run." This expectation is consistent with the view that the neutral nominal federalfunds rate – defined as the value of the federal funds rate that would be neither expansionarynor contractionary if the economy was operating near potential – is currently low by historicalstandards and is likely to rise only gradually over time. The low level of the neutral federalfunds rate may be partially attributable to a range of persistent economic headwinds thatweigh on aggregate demand, including developments abroad, a subdued pace of householdformation, and meager productivity growth. There is considerable uncertainty regardingthe evolution of the neutral funds rate over time. However, if these headwinds abate, as weexpect, the neutral federal funds rate should gradually move higher as well.
This view is implicitly reflected in participants' projections of appropriate monetary policy.The median projection for the federal funds rate rises only gradually to 0.9 percent late thisyear and 1.9 percent next year. As the factors restraining economic growth are projected tofade further over time, the median rate rises to 3 percent by the end of 2018, close to itslonger-run normal level. Compared with the projections made in December, the median path isabout ½ percentage point lower this year and next; the median longer-run normal federalfunds rate has been revised down as well. In other words, most Committee participants nowexpect that achieving economic outcomes similar to those anticipated in December will likelyrequire a somewhat lower path for policy interest rates than foreseen at that time.
I would like to underscore, however, that the participants' projections for the federal fundsrate, including the median path, are not a "plan" for future policy. Policy is not on a presetcourse. These forecasts represent participants' individual assessments of what appropriatepolicy would be given each person's own current projections of the most likely outcomes foreconomic growth, employment, inflation, and other factors. However, considerableuncertainty attaches to each participant's forecasts of economic outcomes. Hence, theirassessments of appropriate policy are also uncertain and will change in response toadjustments to the economic outlook and associated risks, as was the case between Decemberand now.
Also, it is important to note that the Committee makes its decisions on a meeting-by-meetingbasis and does not and need not decide on a likely future path for the federal funds rate.Indeed, the future path of policy is necessarily uncertain because the economy will surelyevolve in unexpected ways. As we note in our statement, "the actual path of the federalfunds rate will depend on the economic outlook as informed by incoming data."
Finally, the Committee will continue its policy of reinvesting proceeds from maturing Treasurysecurities and principal payments from agency debt and mortgage-backed securities. Ashighlighted in our policy statement, we anticipate continuing this policy "until normalization ofthe level of the federal funds rate is well under way." Maintaining our sizable holdings of longer-term securities should help maintain accommodative financial conditions and should reduce therisk that we might have to lower the federal funds rate to zero in the event of a future largeadverse shock.