Sunday, December 13, 2015

FOMC Preview and Review of Projections

by Bill McBride on 12/13/2015 12:08:00 PM

Almost all analysts are expecting the FOMC to raise the Fed Funds rate this week. Most analysts think the federal funds rate will be increased from a target range of "0 to 1/4 percent" to a range of "1/4 to 1/2 percent".

The current effective rate is 0.14 percent, close to the middle of the current range.

For review, here are the key paragraph in the October FOMC statement:

"In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment 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 and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. "
emphasis added
Since that statement, the economy added 298 thousand jobs in October and 211 thousand jobs in November.  The unemployment rate declined further from 5.1% in September to 5.0% in November.  This is the "some further improvement" in the labor market that the FOMC mentioned in the October statement.

Also, based on recent comments, it seems several key members of the FOMC are reasonably confident inflation will move back towards the 2% target.   Of course headline inflation will take another dip due to the recent decline in oil prices.

Here are the September FOMC projections.  Since the release of those projections, Q2 GDP was revised up from 3.7% annualized to +3.9% annualized. And Q2 GDP was reported at 2.1%.  It appears GDP will be up around 2.2% for this year - in the September forecast range.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
201520162017
Sept 2015 2.0 to 2.32.2 to 2.62.0 to 2.4
Jun 2015 1.8 to 2.02.4 to 2.72.1 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 5.0% in October and November, so the unemployment rate projection for Q4 2015 will probably be changed to 5.0% (at the lower end of Sept projection).

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
201520162017
Sept 2015 5.0 to 5.14.7 to 4.94.7 to 4.9
Jun 2015 5.2 to 5.34.9 to 5.14.9 to 5.1
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of October, PCE inflation was up only 0.2% from October 2014.  Since oil prices have declined further since September, headline PCE inflation could move down some more in November and December.  Overall PCE inflation projections will probably be revised down for 2015, and will be well below the FOMC's 2% target.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
201520162017
Sept 2015  0.3 to 0.51.5 to 1.81.8 to 2.0
Jun 2015  0.6 to 0.81.6 to 1.91.9 to 2.0

PCE core inflation was up only 1.3% in October year-over-year.  It appears PCE inflation will be in the September forecast range, and will be mostly unrevised.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
201520162017
Sept 2015 1.3 to 1.41.5 to 1.81.8 to 2.0
Jun 2015 1.3 to 1.41.6 to 1.91.9 to 2.0

Overall, it appears the labor market has improved, and the economy is growing about as expected - although inflation is still low.