Sunday, November 01, 2020

FOMC Preview

by Calculated Risk on 11/01/2020 01:31:00 PM

Expectations are there will be no change to policy when the FOMC meets on Wednesday and Thursday (not the usual Tuesday-Wednesday).

Here are some comments from Goldman Sachs economist David Mericle:

"Without any further discussion of policy changes, the November meeting should be fairly quiet. The economy has continued to recover at a healthy pace since the FOMC last met, but faces risks ahead from the withdrawal of fiscal support and a second virus resurgence. Neither risk is entirely new at this point, and we expect few changes to the FOMC statement.

If a severe winter virus resurgence proved more economically damaging than we expect and the FOMC wanted to respond, its options would be limited. The most likely response would be to adjust the composition or pace of asset purchases, but Fed officials have expressed only lukewarm support for such a move because they see it as unlikely to be particularly effective.
For review, here are the September FOMC projections.

Note that GDP decreased at a 5.0% annual rate in Q1, decreased at a 31.7% annual rate in Q2, and increased at 33.1% annual rate in Q3.   This leaves real GDP down 3.5% from Q4 2019.

Early forecasts are for GDP to increase at a 2% to 3% annual rate in Q4.  These early forecasts would put the economy down around 3% Q4-over-Q4.  That would be at the top end of their September forecast.

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 (and no one knows at this time).  The FOMC also has to factor in further disaster relief, and that is unknown.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date2020202120222023
Sept 2020-4.0 to -3.03.6 to 4.72.5 to 3.32.4 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 7.9% in September and will probably decrease more in Q4.  This will put the unemployment rate in the middle of the range of September projections.

Note that the unemployment rate doesn't remotely capture the economic damage to the labor market.  Not only are there 12.5 million people unemployed, and 4.5 million people have left the labor force since January.  And millions more are being supported by various provisions of the CARES Act - that hasn't been renewed

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date2020202120222023
Sept 20207.0 to 8.05.0 to 6.24.0 to 5.03.5 to 4.4
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of September 2020, PCE inflation was up 1.4% from September 2019. This was above the September projections for Q4.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date2020202120222023
Sept 20201.1 to 1.31.6 to 1.91.7 to 1.91.9 to 2.0

PCE core inflation was up 1.5% in September year-over-year.  This was at the high end of the September projections for Q4.  Note that inflation will not be a concern for the FOMC for the foreseeable future.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date2020202120222023
Sept 20201.3 to 1.51.6 to 1.81.7 to 1.91.9 to 2.0