Monday, December 11, 2017

FOMC Preview

by Bill McBride on 12/11/2017 12:48:00 PM

The consensus is that the Fed will increase the Fed Funds Rate 25bps at the meeting this week.

Assuming the expected happens, the focus will be on the wording of the statement, the projections, and Fed Chair Janet Yellen's final press conference to try to determine how many rate hikes to expect in 2018.

Here are the September FOMC projections.

The projection for GDP in 2017 will likely be revised up.  GDP in Q1 was at 1.2% annualized, Q2 at 3.1%, and Q3 at 3.3%.  Current projections put Q4 GDP at around 2.5% to 2.9%.  This would put GDP (Q4 over Q4) at the high end of the September forecast range.

Note: My guess is, as far as the impact of any fiscal stimulus, the Fed will continue to wait and see and not incorporate any tax cuts in their projections for 2018 and beyond.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
2017201820192020
Sept 2017 2.2 to 2.52.0 to 2.3 1.7 to 2.11.6 to 2.0
June 2017 2.1 to 2.21.8 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 4.1% in both October and November. So the unemployment rate for Q4 2017 will be revised down.  The unemployment rate for 2018 and 2019 will probably be revised down too.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
2017201820192020
Sept 2017 4.2 to 4.34.0 to 4.23.9 to 4.44.0 to 4.5
June 2017 4.2 to 4.34.0 to 4.34.1 to 4.4---
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 1.6% from October 2016.  Based on recent readings, PCE inflation will probably be revised up slightly for Q4 2017, and possibly for 2018.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
2017201820192020
Sept 2017 1.5 to 1.61.8 to 2.02.0 2.0 to 2.1
June 2017 1.6 to 1.71.8 to 2.02.0 to 2.1---


PCE core inflation was up 1.4% in October year-over-year.  Core PCE inflation will probably be unchanged or revised down slightly for Q4 2017.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
2017201820192020
Sept 2017 1.5 to 1.61.8 to 2.02.02.0 to 2.1
June 2017 1.6 to 1.71.8 to 2.02.0 to 2.1---

In general, it appears GDP will be revised up, the unemployment rate revised down, and inflation is mixed.  The inflation outlook will be key for Fed rate hikes in 2018.