Sunday, June 11, 2017

FOMC Preview

by Bill McBride on 6/11/2017 01:04:00 PM

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

Since a rate hike is expected (and assuming it happens), the focus this month will be on the wording of the statement, the projections, and Fed Chair Janet Yellen's press conference.

From Goldman Sachs on the statement: "The statement will likely characterize economic activity as picking up but recognize that inflation slowed since earlier this year."

And from Goldman on the press conference: "The press conference should provide some clarity on whether the next tightening step after June will be balance sheet normalization or a third funds rate hike."

And from Merrill Lynch on the press conference: "We expect the press conference to be focused on balance sheet normalization. Chair Yellen is likely to be asked about the specifics of the balance sheet policy and to elaborate on the potential timing of implementation. ... We also expect Yellen to note that the recent weak data on inflation is likely transitory, but she may provide some hints that she has become a bit more concerned."

Here are the March FOMC projections

The projection for GDP in 2017 will likely be either unchanged or revised down slightly.  GDP in Q1 was at 1.2% annualized, and Q2 looks like around 2.3% to 3.0% based on current forecasts

My guess is, as far as the impact of fiscal stimulus, the Fed will continue to wait and see what the actual proposals will be.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
201720182019
Mar 20172.0 to 2.21.8 to 2.31.8 to 2.0
Dec 2016 1.9 to 2.31.8 to 2.21.8 to 2.0
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 4.3% in May. So the unemployment rate for Q4 2017 will be revised down a few tenths of a percentage point.  2018 will probably be revised down too.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
201720182019
Mar 2017 4.5 to 4.64.3 to 4.64.3 to 4.7
Dec 2016 4.5 to 4.64.3 to 4.74.3 to 4.8
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 1.7% from April 2016.  It appears inflation might be revised down for 2017.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
201720182019
Mar 2017 1.8 to 2.01.9 to 2.02.0 to 2.1
Dec 2016 1.7 to 2.01.9 to 2.02.0 to 2.1

PCE core inflation was up 1.5% in April year-over-year.  Core PCE inflation will probably be revised down for 2017.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
201720182019
Mar 2017 1.8 to 1.91.9 to 2.02.0 to 2.1
Dec 2016 1.8 to 1.91.9 to 2.02.0

In general, it appears GDP and inflation might be revised down (GDP slightly), and the unemployment rate will be revised lower.