Sunday, January 24, 2021

FOMC Preview

by Calculated Risk on 1/24/2021 10:10:00 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:

"The January FOMC meeting should be fairly quiet. While the pace of economic recovery has faltered in recent months due to virus resurgence, nearly all Fed officials have said that the medium-term outlook remains bright. We expect the statement to acknowledge the negative growth news and worsening public health situation but to stop short of suggesting any downgrade to the medium-term outlook. ...Our best guess remains that the Fed begins tapering in 2022 ..."
emphasis added
No projections will be released at this meeting.  However, for review, here are the December 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. Consensus forecasts are for GDP to increase around a 4.3% annual rate in Q4 (to be released this coming Thursday).  This forecast would put the economy down around 2.4% Q4-over-Q4.   Close to the bottom of the December projections.

Some early forecasts for 2021 are for GDP to increase 5% or more in 2021.  For example, Merrill Lynch noted on Friday: 
"The economic outlook for the US is brightening. Our latest work on the consumer gives us another reason to call for upside risk to our already-above consensus GDP forecast of 5% in 2021. Tack on another targeted stimulus package of around $1tn, US growth could easily exceed 6% this year."
But there also downside risk for 2021. For example, if there are vaccine resistant mutations to the virus, or it takes longer than expected to achieve "herd immunity". The pandemic is still a huge unknown.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date2020202120222023
Dec 2020-2.5 to -2.23.7 to 5.03.0 to 3.52.2 to 2.7
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 December. This will put the unemployment rate in the middle of the range of the December projections for Q4.   

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.

My sense is the FOMC was optimistic on the unemployment rate for 2021.  Hopefully I'm wrong.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date2020202120222023
Dec 20206.7 to 6.84.7 to 5.43.8 to 4.63.5 to 4.3
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of November 2020, PCE inflation was up 1.1% from November 2019.    

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date2020202120222023
Dec 20201.21.7 to 1.91.8 to 2.01.9 to 2.1

PCE core inflation was up 1.4% in November year-over-year. 

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date2020202120222023
Dec 20201.41.7 to 1.81.8 to 2.01.9 to 2.1

My guess is core PCE inflation (year-over-year) will increase in 2021 (from the current 1.4%), but I think too much inflation will NOT be a concern in 2021. Since we saw negative MoM PCE and core PCE reading in March and April, we should ignore a jump in YoY inflation in March, April and May!