Sunday, October 30, 2011

FOMC Meeting Preview

by Bill McBride on 10/30/2011 01:55:00 PM

There will be a two day meeting of the Federal Open Market Committee (FOMC) this coming Tuesday and Wednesday. I expect no changes to the Fed Funds rate, or to the recently announced program to "extend the average maturity of its holdings of securities" (scheduled to end in June 2012), or to the program to "reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities".

The FOMC statement will be released at 12:30PM and Fed Chairman Ben Bernanke will hold a quarterly press briefing at 2:15 PM ET.

A couple of things to look for:

1) Fed Chairman Press Briefing. This is the third of the new press briefings. At the press briefing, Chairman Bernanke will discuss the new FOMC forecasts (these forecasts used to be released a few weeks after the FOMC meeting with the minutes). Growth forecasts have surely been revised down since June, the unemployment rate revised up, and inflation forecasts have been revised up.

Mr. Bernanke will probably also discuss some other policy options. I expect he will be asked about the possibility of a large scale MBS purchase program (as recently discussed by Fed Vice Chairman Janet Yellen, NY Fed President William Dudley, and Fed Governor Daniel Tarullo).

Here are the updated forecasts through June. The FOMC GDP forecasts for 2011 have been revised down all year, and will probably be revised down to the 1.5% to 2.0% range. The forecast for 2012 will probably be revised down again too.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1201120122013
Jan 2011 Projections3.4 to 3.93.5 to 4.43.7 to 4.6
April 2011 Projections3.1 to 3.33.5 to 4.23.5 to 4.3
June 2011 Projections2.7 to 2.93.3 to 3.73.5 to 4.2
November 2011 Projections?????????
1 Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was revised down in April, but was revised back up in June. This will probably be revised up to around 9.0% to 9.2% in the November forecast. The forecasts for the unemployment rate in 2012 and 2013 will also be key. In June, the FOMC expected the unemployment rate to be in the 7.0% to 7.5% in Q4 2013 (still high), and this forecast will probably be revised up again.

Note: The first forecast for 2014 will be included too.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2201120122013
Jan 2011 Projections8.8 to 9.07.6 to 8.16.8 to 7.2
April 2011 Projections8.4 to 8.77.6 to 7.96.8 to 7.2
June 2011 Projections8.6 to 8.97.8 to 8.27.0 to 7.5
November 2011 Projections?????????
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

The forecasts for overall and core inflation have been revised up all year and will probably be revised up again in November (PCE inflation will probably be revised up close to 3% and core PCE inflation close to 2%).

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1201120122013
Jan 2011 Projections1.3 to 1.71.0 to 1.91.2 to 2.0
April 2011 Projections2.1 to 2.81.2 to 2.01.4 to 2.0
June 2011 Projections2.3 to 2.51.5 to 2.01.5 to 2.0
November 2011 Projections?????????

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1201120122013
Jan 2011 Projections1.0 to 1.31.0 to 1.51.2 to 2.0
April 2011 Projections1.3 to 1.61.3 to 1.81.4 to 2.0
June 2011 Projections1.5 to 1.81.4 to 2.01.4 to 2.0
November 2011 Projections?????????

2) Possible Statement Changes. The incoming data has been marginally better since the September meeting, so we might see some wording changes. I don't expect the key sentence "The Committee ... currently anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013" to be changed any time soon.

There will probably be some changes to the first paragraph to mention the recent improvement in economic data. I expect the phrase "Household spending has been increasing at only a modest pace" to be upgraded a little.

In the second paragraph, the sentence "there are significant downside risks to the economic outlook, including strains in global financial markets" might also be upgraded a little. There might be some other minor upgrades, but overall the statement will probably be pretty similar to the September statement.

I expect the focus will be on the press briefing and the FOMC forecasts.

Summary for Week ending Oct 28th
Schedule for Week of Oct 30th