Sunday, June 15, 2014

FOMC Preview: More Tapering

by Calculated Risk on 6/15/2014 09:42:00 AM

It appears the FOMC will announce a reduction in monthly asset purchases by another $10 billion per month on Wednesday, from $45 billion to $35 billion following the FOMC meeting.

There will probably be some changes to the FOMC projections, and some minor revisions to the FOMC statement.

Following the release of the FOMC statement, Fed Chair Janet Yellen will hold her second post-FOMC press conference. She will probably be asked about her "six months" comment during the March Q&A. As a reminder, in response to a question about the FOMC statement, she said:

"[T]he language that we used in the statement is considerable period. So I, you know, this is the kind of term it’s hard to define. But, you know, probably means something on the order of around six months, that type of thing.”
She was referring to this sentence in the FOMC statement:
The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
emphasis added
Based on the current pace of tapering, this suggested to many that the first rate hike will be in Q2 or around mid-year 2015.

On the statement, the FOMC will probably change the first paragraph a little. From the statement of April 30th:
Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
This might be changed to 1) drop weather language, 2) upgrade labor market sentence, and 3) upgrade housing slightly.  The first two sentences might be changed to:
Information received since the Federal Open Market Committee met in April indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated.
A key sentence will be on business investment and housing (probably slight upgrade due to higher housing starts).

It will also be interesting to see if there are any changes to the FOMC projections. I expect GDP to be downgraded following the very weak reading in Q1 (due to severe weather).   The unemployment rate will probably be lowered and inflation increased slightly.

For review, here are the previous projections.   GDP for 2014 will be revised down:

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1201420152016
Mar 2014 Meeting Projections2.8 to 3.03.0 to 3.22.5 to 3.0
Dec 2013 Meeting Projections2.8 to 3.23.0 to 3.42.5 to 3.2
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 6.3% in May, so the unemployment rate for Q4 2014 will be probably be lowered again. 

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2201420152016
Mar 2014 Meeting Projections6.1 to 6.35.6 to 5.95.2 to 5.6
Dec 2013 Meeting Projections6.3 to 6.65.8 to 6.15.3 to 5.8
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 1.6% from April 2013, and core inflation was up 1.4%.   Both PCE and core PCE inflation measure will probably be revised up a little, but still be below the FOMC's 2% target. 

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1201420152016
Mar 2014 Meeting Projections1.5 to 1.61.5 to 2.01.7 to 2.0
Dec 2013 Meeting Projections1.4 to 1.61.5 to 2.01.7 to 2.0

Here are the FOMC's recent core inflation projections:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1201420152016
Mar 2014 Meeting Projections1.4 to 1.61.7 to 2.01.8 to 2.0
Dec 2013 Meeting Projections1.4 to 1.61.6 to 2.01.8 to 2.0

Overall tapering will probably continue at the same pace, and the FOMC will be a little more positive.  But I expect there will be no change on the timing for the end of QE3 or on the first rate hike.