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Sunday, September 15, 2013

FOMC Projections Preview: Some Modest Tapering is Possible

by Calculated Risk on 9/15/2013 02:01:00 PM

The FOMC meets on Tuesday and Wednesday of this week.  It seems some modest "tapering" of monthly asset purchases is possible, although not certain.  Perhaps the Fed will reduce their purchases to $75 billion per month from $85 billion per month.   If purchases are reduced, it seems likely that the Fed will continue to purchase agency mortgage-backed securities at the current rate ($40 billion per month), but reduce their purchases of longer-term Treasury securities from $45 billion to $35 billion per month.

In June, most FOMC participants (14 out of 19) judged that the first increase in the federal funds rate would occur in 2015.  Three participants judged 2014 would be appropriate, and only one in 2016.  It is possible that more participants will move out a little (maybe a few more will think 2016 is appropriate, or fewer think 2014).

In the press conference on Wednesday, I expect Fed Chairman Ben Bernanke will probably make it clear that the Fed will not raise rates for a "considerable" time after the end of QE, and it seems likely he will express concern about the low level of inflation.

On the projections, it looks like GDP will be downgraded again, and the projections for the unemployment rate might be reduced slightly.  

Note: March 2012 projections included to show the trend (TBA: To be announced).  The projections this month will be the first for 2016.

GDP increased at a 1.8% annual rate in the first half of 2013.  GDP would have to increase at a 2.8% annual rate in the 2nd half to reach the FOMC lower projection, and at a 3.3% rate to reach the higher projection.

Early forecasts for Q3 are that GDP will increase at around a 1.5% annual rate, so I expect a  decrease in the GDP projections for 2013 at this meeting.  We might see the projections revised down from the 2.3% to 2.6% range in June to 1.8% to 2.2% or so.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP12013201420152016
Sept 2013 Meeting ProjectionsTBATBATBATBA
June 2013 Meeting Projections2.3 to 2.63.0 to 3.52.9 to 3.6
Mar 2013 Meeting Projections2.3 to 2.82.9 to 3.42.9 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.

The unemployment rate was at 7.3% in August and the Q4 projections might be revised down a little.  This really depends on if participants think the employment participation rate will continue to decline - or if it will bounce back a little.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate22013201420152016
Sept 2013 Meeting ProjectionsTBATBATBATBA
June 2013 Meeting Projections7.2 to 7.3 6.5 to 6.85.8 to 6.2
Mar 2013 Meeting Projections7.3 to 7.5 6.7 to 7.06.0 to 6.5
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Projections for inflation will probably be unchanged.  Currently inflation is tracking close to the June projections (as is core inflation).  The current concern is that the inflation projection is below the Fed's target.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation12013201420152016
Sept 2013 Meeting ProjectionsTBATBATBATBA
June 2013 Meeting Projections0.8 to 1.21.4 to 2.01.6 to 2.0
Mar 2013 Meeting Projections1.3 to 1.71.5 to 2.01.7 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation12013201420152016
Sept 2013 Meeting ProjectionsTBATBATBATBA
June 2013 Meeting Projections1.2 to 1.31.5 to 1.81.7 to 2.0
Mar 2013 Meeting Projections1.5 to 1.61.7 to 2.01.8 to 2.0

Conclusion: I expect another downgrade to the GDP projections and possibly some reduction in asset purchases (but not certain).  It does seem odd that the FOMC would start reducing asset purchases while downgrading GDP, and also expressing concern about the downside risks from fiscal policy.   With the unemployment rate too high, and inflation too low, there is a strong argument to wait a few more months before starting to taper asset purchases.