Sunday, December 13, 2020

FOMC Preview

by Calculated Risk on 12/13/2020 10:13:00 AM

Expectations are there will be no change to rate policy when the FOMC meets on Tuesday and Wednesday this week.

Here are some comments from Goldman Sachs economists David Mericle and Laura Nicolae:

"Fed officials are likely to see larger near-term risks but a brighter medium-term outlook as they head into their December meeting next week. The winter virus resurgence has grown much worse since the last meeting, but the vaccine news should inspire more confidence in 2021 recovery prospects than when Fed officials last wrote down projections in September.

We expect this brighter outlook to translate to slightly rosier economic projections including a 2021 growth forecast of just over 4% ... We also expect a somewhat lower unemployment rate path, but no changes to the inflation projections beyond this year.
Markets will be most focused on possible changes to the Fed’s asset purchase policy next week. The minutes to the November meeting indicate that the FOMC discussed both forward guidance for asset purchases and possible changes to the composition or size of asset purchases.
emphasis added
For review, here are the September FOMC projections.

Note that GDP decreased at a 5.0% annual rate in Q1, decreased at a 31.4% annual rate in Q2, and increased at 33.1% annual rate in Q3. This leaves real GDP down 3.5% from Q4 2019.

Wall Street forecasts are for GDP to increase at a 5% to 6% annual rate in Q4.  These forecasts would put the economy down around 2.1% to 2.3% Q4-over-Q4.  That would be above the high 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 the impact of the current surge of the pandemic - and when the pandemic will subside and end (likely sometime in mid-2021 with the vaccine).  The FOMC also has to factor in further disaster relief, and that is still unknown.

It is likely that GDP forecasts for 2020 will be revised up, and also for 2021.

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 6.7% in November, down from 6.9% in October, and might decrease more in December.  This will put the unemployment rate for Q4 below the lower end of the September projections.   

So the unemployment rate for Q4 2020 will be revised down.

Note that the unemployment rate doesn't remotely capture the economic damage to the labor market.  Not only are there 10.7 million people unemployed, and 4.1 million people have left the labor force since January.  And millions more are being supported by various provisions of the CARES Act - that still hasn't been renewed and is schedule to expire on December 26th.

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 October 2020, PCE inflation was up 1.2% from October 2019. This was in the middle of 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 1.4% in October year-over-year.  This was also in the middle 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