Monday, March 14, 2016

FOMC Preview and Review of Projections

by Bill McBride on 3/14/2016 01:01:00 PM

Almost all analysts are expecting no change in Fed policy at the March FOMC meeting this week. Currently the Fed Funds target rate is the range of "1/4 to 1/2 percent".

The current effective rate is 0.36 percent, close to the middle of the current range.

The focus this month will be on the wording of the statement, any changes to the projections, and on the press conference.

In the December statement, the FOMC characterized the risks to the economy as "balanced":

Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced.
"Balanced" was removed in the January statement.  Based on incoming data, many analysts expect the FOMC to add "balanced" back to the March statement (preparing to raise rates in June or even April).

As example, from Goldman Sachs:
We do not think the committee is ready to raise rates next week, but expect the statement to say that risks are “nearly balanced”. Guidance from the meeting in general should indicate that another rate hike is likely before too long—we expect an increase at the June 14-15 FOMC meeting, but action at the April 26-27 meeting is not inconceivable.
And some comments from Merrill Lynch:
The March meeting will include an updated Summary of Economic Projections (SEP), to be released at 2 PM. We expect the updated dot plot will show a median of three hikes for this year (with a number of dots at two hikes) and four for 2017. In this sense, not hiking in March is similar to last September’s “tactical delay” of liftoff. The opening paragraph of the statement and Yellen’s subsequent press conference remarks should note that the US data recently have shown improvement on net. Indeed, we expect some signs of optimism in the discussion of the outlook going forward, supporting the Fed’s forecast for additional hikes later this year. April should remain a “live” meeting.
Here are the December FOMC projections.  Since the release of those projections, Q4 GDP was reported at a 1.0% annual rate.  That put GDP up 1.9% Q4 2015 over Q4 2016 (Note: GDP was up 2.4% in 2015 compared to 2014, but the Fed projects Q4 over Q4).

Currently GDP is tracking around 2.2% annualized in Q1.  The FOMC might revise down GDP for 2016 slightly.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
2015201620172018
Dec 2015 2.12.3 to 2.52.0 to 2.31.8 to 2.2
Sept 2015 2.0 to 2.32.2 to 2.62.0 to 2.41.8 to 2.2
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 4.9% in February, so the unemployment rate projection for Q4 2016 will probably be unchanged.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
2015201620172018
Dec 2015 5.04.6 to 4.84.6 to 4.84.6 to 5.0
Sept 2015 5.0 to 5.14.7 to 4.94.7 to 4.94.7 to 5.0
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of January, PCE inflation was up only 1.3% from January 2015.   Overall PCE inflation projections might be revised up slightly for 2016.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
2015201620172018
Dec 2015  0.41.2 to 1.71.8 to 2.01.9 to 2.0
Sept 2015  0.3 to 0.51.5 to 1.81.8 to 2.02.0

PCE core inflation was up 1.7% in January year-over-year.  It appears core PCE inflation will be revised up slightly for 2016.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
2015201620172018
Dec 2015 1.31.5 to 1.71.7 to 2.01.9 to 2.0
Sept 2015 1.3 to 1.41.5 to 1.81.8 to 2.01.9 to 2.0

Overall, it appears the labor market has improved, and the economy is growing about as expected - and inflation is slowly moving towards the Fed's target.