Sunday, March 15, 2020

FOMC Preview

by Calculated Risk on 3/15/2020 08:11:00 AM

Expectations are that the FOMC will reduce the Fed Funds rate 100bps to a target range of 0 to 1/4 percent at the meeting this week. This is in response to the COVID-19 pandemic.

For review, here are the December FOMC projections.  In general the data has been close to expectations, however the economy has come to a sudden stop - and the projections for 2020 will probably change significantly.

Forecast for Q1 GDP have mostly ranged between 1% and 2%, however many sectors will be hard hit in March, and Q1 GDP will probably be close to 0%.   It seems likely that GDP in Q2 will be negative, so I expect the FOMC to revise down their 2020 forecasts significantly.   They might revise up their 2021 forecasts.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
202020212022
Dec 20192.0 to 2.21.8 to 2.01.8 to 2.0
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 3.5% in February.   With the impact of COVID-19, the unemployment rate will probably increase over the next several months - maybe longer.  I expect the FOMC will revise up their Q4 2020 unemployment forecast.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
202020212022
Dec 20193.5 to 3.73.5 to 3.93.5 to 4.0
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of January 2019, PCE inflation was up 1.7% from January 2019.   With the sharp decline in oil prices and the economic stop in March, PCE inflation will probably be revised down for Q4 2020.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
202020212022
Dec 20191.8 to 1.92.0 to 2.12.0 to 2.2

PCE core inflation was up 1.6% in January year-over-year.    It seems likely core inflation will also be revised down for Q4 2020.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
202020212022
Dec 20191.9 to 2.02.0 to 2.12.0 to 2.2