Saturday, June 15, 2013

FOMC Projections Preview: Disinflation Watch

by Bill McBride on 6/15/2013 08:48:00 PM

The FOMC meets on Tuesday and Wednesday of the coming week.  I expect no policy change following the FOMC meeting with the Fed continuing to purchase $85 billion in longer-term Treasury and agency mortgage-backed securities per month. I also expect the forward guidance thresholds will remain unchanged.

In the press conference on Wednesday, I expect Fed Chairman Ben Bernanke to argue we still need to see "substantial improvement" in the labor market, and to note the downside risks to the economy, especially from current fiscal policy.  He will probably make it clear that the Fed will not raise rates for a "considerable" time after the end of QE, and it seems likely he will express some concern about the low level of inflation.

Looking at the May 1st FOMC statement, the sentence on inflation will probably be changed:

"Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable."
This will probably be changed to something like "Measures of underlying inflation have trended lower, and the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term". 

The first part of the sentence is from the November 2010 FOMC meeting; the last part of that sentence is from the FOMC's March 2009 statement.  Those were key meetings for the FOMC: In 2009, the FOMC expanded QE1, and in November 2010, the FOMC announced QE2.

On the projections, it looks like GDP will be downgraded again, and inflation projections will be reduced.  The projections for the unemployment rate will probably be unchanged.  Note: December 2012 projections included to show the trend, TBA - To be announced.

The central range for 2012 GDP will probably be closer to the lower end of the March projections.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1201320142015
June 2013 Meeting ProjectionsTBATBATBA
Mar 2013 Meeting Projections2.3 to 2.82.9 to 3.42.9 to 3.7
Dec 2012 Meeting Projections2.3 to 3.03.0 to 3.53.0 to 3.7
1 Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 7.6% in May and the June projections will probably be unchanged.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2201320142015
June 2013 Meeting ProjectionsTBATBATBA
Mar 2013 Meeting Projections7.3 to 7.5 6.7 to 7.06.0 to 6.5
Dec 2012 Meeting Projections7.4 to 7.7 6.8 to 7.36.0 to 6.6
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Projections for inflation will probably be reduced.  Goldman Sachs believes the FOMC will lower the central projection for PCE inflation to 1.25% in 2013, and core PCE to 1.3%.  The current concern is that inflation is below the Fed's target.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1201320142015
June 2013 Meeting ProjectionsTBATBATBA
Mar 2013 Meeting Projections1.3 to 1.71.5 to 2.01.7 to 2.0
Dec 2012 Meeting Projections1.3 to 2.01.5 to 2.01.7 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1201320142015
June 2013 Meeting ProjectionsTBATBATBA
Mar 2013 Meeting Projections1.5 to 1.61.7 to 2.01.8 to 2.0
Dec 2012 Meeting Projections1.6 to 1.91.6 to 2.01.8 to 2.1

Conclusion: I expect no change to policy at this meeting, but a slight downgrade to the economic projections - and some concern about inflation (but probably not enough to increase the size of QE3 purchases).

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