Sunday, December 11, 2016

Review of FOMC Projections

by Bill McBride on 12/11/2016 08:11:00 AM

The consensus is that the Fed will raise the Fed Funds Rate 25 bps following the FOMC meeting this coming week.

Since the rate hike is expected (and assuming it happens), the focus this month will be on hints about the next move from the wording of the statement, the projections, and Fed Chair Janet Yellen's press conference.  My guess is, as far as the impact of fiscal stimulus, the Fed will wait and see what the actual proposals will be.

Here are the September FOMC projections.  Since the release of those projections, Q3 GDP was reported at a 3.2% annual rate.

Currently GDP is tracking around 2.6% annualized in Q4. That would put real GDP up 2.0% in Q4 2016 over Q4 2015.  2016 GDP will probably be revised up slightly, but it will be interesting to see if projections for 2017 and 2018 are revised up due to possible fiscal stimulus.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
2016201720182019
Sept 2016 1.7 to 1.91.9 to 2.21.9 to 2.21.7 to 2.0
Jun 2016 1.9 to 2.01.9 to 2.21.8 to 2.1n.a.
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 4.6% in November and 4.9% in October, so the unemployment rate projection for Q4 2016 will probably be revised down slightly.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
2016201720182019
Sept 2016 4.7 to 4.94.5 to 4.74.4 to 4.74.4 to 4.8
Jun 2016 4.6 to 4.84.5 to 4.74.4 to 4.8n.a.
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 1.4% from October 2015.  With oil prices up year-over-year, PCE inflation has been moving up.  It appears inflation will be revised up for 2016, but the key will be if inflation is revised up for 2017 and 2018.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
2016201720182019
Sept 2016 1.2 to 1.41.7 to 1.91.8 to 2.01.9 to 2.0
Jun 2016 1.3 to 1.71.7 to 2.01.9 to 2.0n.a.

PCE core inflation was up 1.7% in October year-over-year.  This is still in the September projection range, and will probably only be changed slightly.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
2016201720182019
Sept 2016 1.6 to 1.81.7 to 1.91.8 to 2.01.9 to 2.0
Jun 2016 1.6 to 1.81.7 to 2.01.9 to 2.0n.a.

In general, it appears GDP and inflation will be revised up slightly, and the unemployment rate revised lower.   If this continues, look for the Fed to raise rates again in the first half of 2017.