Sunday, March 17, 2013

FOMC Projections Preview

by Calculated Risk on 3/17/2013 11:34:00 AM

The FOMC meets on Tuesday and Wednesday of the coming week.  I expect no policy change following the FOMC meeting, with the Fed continuing to purchase $85 billion in longer-term Treasury and agency mortgage-backed securities per month. I also expect the forward guidance thresholds will remain unchanged.

However, in recognition of recent data, I do expect a modest upgrade to the FOMC statement and quarterly economic projections, while recognizing certain downside risks (sequestration budget cuts, Cyprus bailout and depositor levy, Italian election uncertainty, and other international issues).

In the press conference, Fed Chairman Ben Bernanke will probably be asked about the Cyprus bailout, how the "sequestration budget cuts" impact the outlook, the sustainability of the recent economic pickup, what “substantial improvement” in the labor market means, and about tapering off the asset purchases later this year. I expect Bernanke's comments to be cautious, to argue we still need to see "substantial improvement" in the labor market, to note the downside risks to the economy, and to argue any pickup in inflation is transitory. He will also repeat that the benefits of QE outweigh the costs, and the Fed has the tools to exit the current highly accommodative policy.

Looking at the December FOMC statement, the first sentence will be changed:

"Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors."
This will probably be upgraded to something like "economic activity has resumed expansion at a moderate pace in recent months".

On inflation, the FOMC will probably repeat this sentence from the December meeting:
"Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable."
On the projections, it looks like GDP might be upgraded slightly, inflation will be close to the December FOMC projections, and the projections for the unemployment rate will probably be lowered again.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1201320142015
Dec 2012 Meeting Projections2.3 to 3.03.0 to 3.53.0 to 3.7
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.

I expect the FOMC will revise up slightly their 2013 and 2014 GDP forecasts.  We might see a wider range for GDP in 2013 based on how each participant weighs the downside risks.

The unemployment rate was at 7.7% in February.  This has already fallen to the top range of the December projections, and suggests the unemployment rate projections for 2013, 2014 and 2015 will be revised down.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2201320142015
Dec 2012 Meeting Projections7.4 to 7.7 6.8 to 7.36.0 to 6.6
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Both measures of inflation will be close to the December projections, and I expect the forecasts for  inflation will show the FOMC is still not concerned about inflation going forward.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1201320142015
Dec 2012 Meeting Projections1.3 to 2.01.5 to 2.01.7 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1201320142015
Dec 2012 Meeting Projections1.6 to 1.91.6 to 2.01.8 to 2.0

Conclusion: I expect no change to policy at this meeting, but a slight upgrade to the economic outlook while noting the downside risks.  I think it is too early for a change in the size of the monthly QE purchases.    On projections, I expect GDP to be revised up slightly for 2013, and the unemployment rate to be revised lower.