Monday, June 11, 2018

FOMC Preview

by Bill McBride on 6/11/2018 09:22:00 AM

The consensus is that the Fed will increase the Fed Funds Rate 25bps at the meeting this week, and the tone will remain upbeat.

Assuming the expected happens, the focus will be on the wording of the statement, the projections, and Fed Chair Jerome Powell's press conference to try to determine how many rate hikes to expect in 2018 and in 2019.

Here are the March FOMC projections.

Current projections for Q2 GDP range from 3.1% to 4.5%. GDP increased at a 2.2% real annual rate in Q1.   This puts first half GDP close to the top of the expected range, and GDP projections might be revised up.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
201820192020
Mar 20182.6 to 3.0 2.2 to 2.61.8 to 2.1
Dec 20172.2 to 2.61.9 to 2.31.7 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 3.8% in May. So the unemployment rate projection for 2018 will probably be lowered.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
201820192020
Mar 20183.6 to 3.83.4 to 3.73.5 to 3.8
Dec 20173.7 to 4.03.6 to 4.03.6 to 4.2
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 2.0% from April 2017.  Based on recent PCE readings, PCE inflation will likely be revised up for 2018.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
201820192020
Mar 20181.8 to 2.02.0 to 2.22.1 to 2.2
Dec 20171.7 to 1.92.02.0 to 2.1

PCE core inflation was up 1.8% in April year-over-year. Core PCE inflation might also be revised up  for 2018.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
201820192020
Mar 20181.8 to 2.02.0 to 2.22.1 to 2.2
Dec 20171.7 to 1.92.02.0 to 2.1

In general the data has been somewhat firmer than the FOMC's March projections, so it seems likely the FOMC will be on track for four rate hikes in 2018.