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Saturday, November 09, 2013

Update: Four Charts to Track Timing for QE3 Tapering

by Calculated Risk on 11/09/2013 04:43:00 PM

Here is an update of the four charts I'm using to track when the Fed will start tapering the QE3 purchases.

In general the year-end data might be "broadly consistent" with the June (and September) FOMC projections.

However I suspect the FOMC is very concerned about the low level of inflation, and also the decline in the employment participation rate.

The December FOMC meeting is on the 17th and 18th.

FOMC Projection Unemployment Rate TrackingClick on graph for larger image.

The first graph is for the unemployment rate.

The current forecast is for the unemployment rate to decline to 7.1% to 7.3% in Q4 2013.

We only have data through October - and that data was muddled by the government shutdown - however so far the unemployment rate is tracking the FOMC forecast (lower is better). 

However, in July, Bernanke said that the unemployment rate "probably understates the weakness of the labor market." (He repeated this yesterday). He suggested he is watching other employment indicators too, and I suspect the FOMC will be looking closely at the participation rate in the November employment report.

FOMC Projection GDP Tracking The second graph is for GDP.

The current forecast is for GDP to increase between 2.0% and 2.3% (the FOMC revised down their forecast from 2.3% and 2.6% in June).  This is the increase in GDP from Q4 2012 to Q4 2013.

Currently GDP is tracking the FOMC forecasts, and real GDP only has to increase 1.5% annualized in Q4 to reach the lower forecast  (Edit: Corrected required Q4 growth rate, ht Michael)

The third graph is for PCE prices.

FOMC Projection PCE price TrackingThe current forecast is for prices to increase 1.1% to 1.2% from Q4 2012 to Q4 2013.  This was revised up from 0.8% to 1.2% in June.

So far PCE prices are close just below this projection - however this projection is significantly below the FOMC target of 2%. Clearly the FOMC expects inflation to pickup, and a key is if the recent decline in inflation is "transitory".

The fourth graph is for core PCE prices

FOMC Projection Core PCE Price TrackingThe current forecast is for core prices to increase 1.2% to 1.3% from Q4 2012 to Q4 2013.

So far core PCE prices are just below this projection - and, once again, this projection is significantly below the FOMC target of 2%.