Sunday, June 12, 2016

FOMC Preview and Review of Projections

by Bill McBride on 6/12/2016 10:15:00 AM

Almost all analysts are expecting no change in Fed policy at the March FOMC meeting this week. As an example, from Goldman Sachs economists Jan Hatzius and Zach Pandl:

"The May employment report was weak enough to raise questions about momentum in the labor market and the economy more broadly. At this point the natural reaction from policymakers will likely be to wait for more information and keep options open—and this should be the message from Chair Yellen in her press conference.

... With the unemployment rate at 4.7%, wage growth clearly picking up, and financial conditions much easier, there is likely a limit to how long the Fed’s pause can last.
Currently the Fed Funds target rate is the range of "1/4 to 1/2 percent". The current effective rate is 0.37 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.

Here are the March FOMC projections.  Since the release of those projections, Q1 GDP was reported at a 0.8% annual rate.

Currently GDP is tracking around 2.5% annualized in Q2.  The FOMC might revise down GDP for 2016 slightly.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
201620172018
Mar 2016 2.1 to 2.32.0 to 2.31.8 to 2.1
Dec 2015 2.3 to 2.52.0 to 2.31.8 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 4.7% in May, so the unemployment rate projection for Q4 2016 might be revised down.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
201620172018
Mar 2016 4.6 to 4.84.5 to 4.74.5 to 5.0
Dec 2015 4.6 to 4.84.6 to 4.84.6 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 April, PCE inflation was up only 1.1% from April 2015.   With the recent increase in oil and gasoline prices, the range of PCE inflation projections might be narrowed, and the low end revised up for 2016.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
201620172018
Mar 2016  1.0 to 1.61.7 to 2.01.9 to 2.0
Dec 2015  1.2 to 1.71.8 to 2.01.9 to 2.0

PCE core inflation was up 1.6% in April year-over-year.  It appears core PCE inflation might be revised up slightly for 2016.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
201620172018
Mar 2016 1.4 to 1.71.7 to 2.01.9 to 2.0
Dec 2015 1.5 to 1.71.7 to 2.01.9 to 2.0

Overall, it appears these indicators are close to expectations.   The FOMC will probably take no action at the meeting this week, and wait to see if employment picks up in June.