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Sunday, July 27, 2014

FOMC Preview: More Tapering

by Calculated Risk on 7/27/2014 09:57:00 AM

The Federal Open Market Committee (FOMC) meets on Tuesday and Wednesday of this coming week, and it is almost certain that the FOMC will announce a reduction in monthly asset purchases by another $10 billion per month, from $35 billion to $25 billion. The FOMC statement will be released at 2:00 PM ET on Wednesday, and there will be no press conference after this meeting.

Right now it appears that the FOMC will also reduce QE3 another $10 billion at the September meeting (Sept 17th), and announce the end of QE3 in October (Oct 29th).

On the statement, the FOMC will probably only make small changes. From Goldman Sachs economist David Mericle:

We expect that next week’s FOMC statement will show very little change. The FOMC might choose to upgrade the language on growth in economic activity somewhat, and it might also strengthen the language on labor market indicators a touch in recognition of the strong June employment report. For the most part, however, recent data have supported the characterization of current conditions in the June statement. In particular, the softer June CPI print likely reinforced the Committee’s decision to downplay the firmer inflation prints seen from March to May, and weak housing starts and new home sales reports have likely reinforced concern about the housing sector.
For review, here are the June FOMC projections (Projections will be updated next at the September meeting).  

The advance estimate of Q2 GDP will be released Wednesday morning, and the consensus is that real GDP increased 2.9% annualized in Q2. Depending on revisions, this would suggest no growth in the first half of 2014 (although other indicators would suggest some growth) - and this would mean another downgrade for GDP at the September meeting.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1201420152016
June 2014 Meeting Projections2.1 to 2.33.0 to 3.22.5 to 3.0
Mar 2014 Meeting Projections2.8 to 3.03.0 to 3.22.5 to 3.0
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 6.1% in June, and it seems the unemployment rate projection will be lowered again in September.    It is possible the FOMC will also lower their long run unemployment projection too.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2201420152016
June 2014 Meeting Projections6.0 to 6.15.4 to 5.75.1 to 5.5
Mar 2014 Meeting Projections6.1 to 6.35.6 to 5.95.2 to 5.6
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of May, PCE inflation was up 1.8% from May 2013, and core inflation was up 1.5%.  The FOMC expects inflation to increase in 2014, but remain below their 2% target (Note: the FOMC target is supposedly symmetrical around 2%, although some analysts think the FOMC is acting as if 2.0% is a ceiling). 

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1201420152016
June 2014 Meeting Projections1.5 to 1.71.5 to 2.01.6 to 2.0
Mar 2014 Meeting Projections1.5 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
June 2014 Meeting Projections1.5 to 1.61.6 to 2.01.7 to 2.0
Mar 2014 Meeting Projections1.4 to 1.61.7 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 (at the October meeting) or on the first rate hike (sometime in 2015).