Friday, June 12, 2015

FOMC Preview: No Rate Hike

by Bill McBride on 6/12/2015 12:04:00 PM

First a preview from Nomura economists:

The monetary policy statement released at the conclusion of the 16-17 June FOMC meeting should not have substantive changes. We expect the Committee to upgrade its assessment of economic activity, which it described as having slowed in the April statement. The FOMC will also release its summary of economic projections. We expect the Committee to lower its growth forecasts for 2015 given weak growth in Q1. There are some risks for the FOMC’s expectations for the target federal funds rate to be lowered for 2015, but we do not expect major changes for the long-run federal funds rate forecasts. We expect Chair Yellen in her post-meeting press conference to continue to stress the data-dependent nature of future policy moves and that the pace of tightening will likely be gradual once normalization begins.

And some comments on inflation from Goldman Sachs economists David Mericle and Karen Reichgott:
Core PCE inflation is running at just 1.2% year-on-year heading into the June FOMC meeting, well below the Fed's 2% target. ... We find that core PCE inflation is likely to remain soft in the near term and will likely have moved sideways or a touch lower when Fed officials meet again in September and December.

The firmer CPI data likely provide some offset to these numbers, especially because much of the difference comes from lower PCE health care prices, where policy changes have made interpreting the inflation data more challenging. In addition, the stability of inflation expectations also offers some reassurance. Based on recent commentary from Fed officials, we expect that the FOMC will ultimately look past the PCE numbers, and our baseline for liftoff remains September.
Here are the projections from the March FOMC meeting.

With Q1 GDP mostly unchanged, it seems likely GDP for 2015 will be revised down again.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
201520162017
Mar 2015 Meeting Projections2.3 to 2.72.3 to 2.72.0 to 2.5
Dec 2014 Meeting Projections2.6 to 3.02.5 to 3.02.3 to 2.5
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 5.5% in May.   The unemployment rate has only decline 0.1 percentage points since December, so the projection for Q4 2015 might be unchanged or revised up a little.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
201520162017
Mar 2015 Meeting Projections5.0 to 5.24.9 to 5.14.8 to 5.1
Dec 2014 Meeting Projections5.2 to 5.35.0 to 5.24.9 to 5.3
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of April, PCE inflation was up only 0.1% from April 2014.  Headline PCE will probably be revised lower for 2015.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
201520162017
Mar 2015 Meeting Projections0.6 to 0.81.7 to 1.91.9 to 2.0
Dec 2014 Meeting Projections1.0 to 1.61.7 to 2.01.8 to 2.0

PCE core inflation was up only 1.2% in April.  Core PCE inflation might be revised down again for 2015 (see Goldman comments above).

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
201520162017
Mar 2015 Meeting Projections1.3 to 1.41.5 to 1.91.8 to 2.0
Dec 2014 Meeting Projections1.5 to 1.81.7 to 2.01.8 to 2.0