Sunday, September 17, 2017

FOMC Preview

by Bill McBride on 9/17/2017 08:11:00 AM

The consensus is that the Fed will not change the Fed Funds Rate at the meeting this coming week.  However the Fed is expected to start the process of balance sheet normalization.

Assuming the expected happens - no rate hike and the start of balance sheet normalization - the focus will be on the wording of the statement, the projections, and Fed Chair Janet Yellen's press conference to try to determine if there will be a 3rd rate hike in 2017 at the December meeting.

Here are the June 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 at 3.0%.  Currently projections put Q3 GDP at around 1.3% to 2.2% (the hurricanes probably pushed down Q3 GDP, and some bounce back is likely in Q4).

My guess is, as far as the impact of any 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
June 2017 2.1 to 2.21.8 to 2.21.8 to 2.0
Mar 20172.0 to 2.21.8 to 2.31.8 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 4.4% in August. So the unemployment rate for Q4 2017 will probably be unchanged.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
201720182019
June 2017 4.2 to 4.34.0 to 4.34.1 to 4.4
Mar 2017 4.5 to 4.64.3 to 4.64.3 to 4.7
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of July, PCE inflation was up 1.4% from July 2016.  It appears inflation might be revised down for 2017.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
201720182019
June 2017 1.6 to 1.71.8 to 2.02.0 to 2.1
Mar 2017 1.8 to 2.01.9 to 2.02.0 to 2.1


PCE core inflation was up 1.4% in July 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
June 2017 1.6 to 1.71.8 to 2.02.0 to 2.1
Mar 2017 1.8 to 1.91.9 to 2.02.0 to 2.1

In general, it appears GDP and inflation might be revised down (GDP slightly), and the unemployment rate will be unchanged.  The inflation outlook will be key for a Fed rate hike in December.