Sunday, July 26, 2020

FOMC Preview

by Calculated Risk on 7/26/2020 11:47:00 AM

Expectations are there will be no change to policy when the FOMC meets this week.

Here are some comments from Goldman Sachs economist David Mericle:

"We do not expect major changes at the July meeting ... We now expect the FOMC to complete its framework review in September and to then change its forward guidance and asset purchase policies in November ... [In the future] we expect the FOMC to adopt average inflation targeting, effectively raising the inflation goal to a 2-2.5% range when the economy is at full employment ... We think the FOMC will eventually switch to outcome-based forward guidance that delays liftoff until the economy achieves both full employment and 2% inflation, a goal that we do not expect to be met until roughly 2025.
For review, here are the June FOMC projections.  (Projections will not be updated at this meeting)

GDP decreased at a 5.0% annual rate in Q1, and most forecasts are for a seasonal adjusted annual rate decline of 30% to 35% in Q2 - and for GDP to decline in 2020. As an example, from Merrill Lynch economists:
The advance 2Q GDP estimate comes out next Thursday and will reveal the depth of the recession. Real activity likely collapsed -36% qoq saar, translating into a peak-to-trough decline of -11.7%. ... We forecast a contraction of -5.7% in 2020, followed by a 3.4% rebound 2021.
The course of the economy will depend on the course of the pandemic, so the FOMC has to factor in their expectations of when the pandemic will subside and end (nobody knows at this time).

With the recent surge in COVID cases and deaths, the 2nd half of 2020 might be weaker than the FOMC expected in June.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202020212022
June 2020-7.6 to -5.54.5 to 6.03.0 to 4.5
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 11.1% in June.   The unemployment rate declined faster in May and June than most expectations, however, it appears the bounce back in employment has stalled in July.

Note that the unemployment rate doesn't remotely capture the economic damage to the labor market.  Not only are there almost 18 million people unemployed, close to 5 million people have left the labor force since January.  And millions more are being supported by the Paycheck Protection Program (PPP).   Over 50% of households have reported lost income in a recent Census survey.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202020212022
June 20209.0 to 10.05.9 to 7.54.8 to 6.1
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of May 2020, PCE inflation was up 0.5% from May 2019.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202020212022
June 20200.6 to 1.01.4 to 1.71.6 to 1.8

PCE core inflation was up 1.0% in May year-over-year.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202020212022
June 20200.9 to 1.11.4 to 1.71.6 to 1.8

Inflation is not a concern for the FOMC.