Sunday, June 13, 2021

FOMC Preview

by Calculated Risk on 6/13/2021 08:47:00 AM

Expectations are there will be no change to rate policy when the FOMC meets on Tuesday and Wednesday this week, but that the FOMC will talk about the path of asset purchases.

Here are some comments from Merrill Lynch economists:

"Based on the FOMC minutes and subsequent speeches, we think Fed Chair Powell will note that Fed officials talked about the path of asset purchases, but that they are still very comfortable with the current program. He will reiterate that it is “some time” before substantial further progress in the economy has been made to justify a change in asset purchases. And finally he will note that starting to discuss the path for asset purchases is consistent with the idea that the Fed wants to give an abundance of guidance about changes to the policy ...

We expect the SEP forecasts to reveal a significant upward revision to core and headline PCE this year given the recent data; we are forecasting 3.1% and 3.5%, respectively, for this year (4Q/4Q change). The more important signal will be if the Fed also revises up core inflation for 2022 and 2023, which would suggest that they believe some of the gain in inflation will prove to be a bit more persistent — we think the risk is that 2022 increases to 2.1%. We also expect upward revisions to GDP this year but unlikely changes in the out years. We don’t expect significant changes to the unemployment rate."
emphasis added
For review, below are the March FOMC projections.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202120222023
Mar 20215.8 to 6.63.0 to 3.82.0 to 2.5
Dec 20203.7 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.

Note that real GDP increased 6.4% annualized in Q1.   And forecasts are for GDP to increase close to 10% in Q2.

It seems likely there will be a further upgrade to the GDP forecast for 2021.   

The unemployment rate was at 5.8% in May.

As people reenter the labor force - pushing up the participation rate - the improvement in the unemployment rate will likely slow.  So it seems like there will be little change to the March unemployment projections.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202120222023
Mar 20214.2 to 4.73.6 to 4.03.2 to 3.8
Dec 20204.7 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 April 2021, PCE inflation was up 3.6% from April 2020. There was some base effect (since PCE inflation declined last year in the early months of the pandemic), but there was a clear pickup in inflation.

The FOMC will revise up their inflation projections. Merrill economists expect PCE inflation projections to be increased to around 3.1% for 2021.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202120222023
Mar 20212.2 to 2.41.8 to 2.12.0 to 2.2
Dec 20201.7 to 1.91.8 to 2.01.9 to 2.1

PCE core inflation was up 3.1% in April year-over-year and the projections for 2021 will be revised up.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202120222023
Mar 20212.0 to 2.31.9 to 2.12.0 to 2.2
Dec 20201.7 to 1.81.8 to 2.01.9 to 2.1

It will be interesting to see if the FOMC projects an overshoot in inflation in 2022 or 2023.