3 Updated Economic Projections from the Federal Reserve

Federal Reserve

Source: http://www.flickr.com/photos/23165290@N00/

The Federal Open Market Committee concluded a two-day policy meeting on Wednesday and, contrary to expectations, announced that it would continue purchasing $40 billion worth of agency mortgage-backed securities and $45 billion worth of longer-term securities per month. The specter of the taper lives on to haunt Mr. Market until at least October 30, when the next FOMC meeting concludes.

Equities jumped on the news. The S&P 500 climbed a full percentage point immediately following the announcement, with the Dow and Nasdaq close behind. Meanwhile, the rate on the 10-year Treasury note fell by about 10 basis points. Fed Chairman Ben Bernanke, as before, emphasized two things during the post-meeting press conference: policy would remain adaptive to incoming economic data and that economic growth is expected to remain “moderate” in the coming months.

Alongside the policy announcement, the Fed provided updated economic projections, including new projections for 2016. At a glance: overall growth projections have been reduced, employment expectations have improved modestly in the long-run, and inflation expectations have narrowed slightly.

Gross Domestic Product

Projections for real GDP growth was reduced for 2013 and 2014, while the central tendency for growth in 2015 narrowed slightly. In 2016, the Fed is looking at real GDP growth in a range between 2.5 and 3.3 percent.

Change in real GDP

Central Tendency

2013

2014

2015

2016

Longer run

June projection

2.3 to 2.6

3.0 to 3.5

2.9 to 3.6

n/a

2.3 to 2.5

September projection

2.0 to 2.3

2.9 to 3.1

3.0 to 3.5

2.5 to 3.3

2.2 to 2.5

Real GDP increased at an annual rate of 2.5 percent in the second quarter, according to the Bureau of Economic Analysis. This compares to the 1.1 percent rate of growth recorded in the first quarter and a 0.1 percent growth rate in the fourth quarter of 2012. Alongside consumer spending, rising exports and real estate spending helped boost the second-quarter numbers even as lower government spending acted as a drag.

Sep FOMC GDP

Source: U.S. Federal Reserve

Unemployment

Unemployment projections were little changed, but somewhat encouraging is that the lower limit of the central tendency was lowered in both 2013 and 2014. Headline unemployment declined to 7.3 percent in August, already at the upper limit of the Fed’s projection.

Unemployment rate

Central Tendency

2013

2014

2015

2016

Longer run

June projection

7.2 to 7.3

6.5 to 6.8

5.8 to 6.2

n/a

5.2 to 6.0

September projection

7.1 to 7.3

6.4 to 6.8

5.9 to 6.2

5.4 to 5.9

5.2 to 5.8

During the press conference, Bernanke was asked about the impact that a reduction in the labor force participation rate has had on the headline unemployment rate. The labor force participation rate in August was 63.2 percent, down from about 66 percent in the pre-crisis period. While this reduction has had an impact on the headline rate, Bernanke suggested that payroll growth — +169,000 in August — has accounted for most of the decline.

Sep FOMC Unemployment

Source: U.S. Federal Reserve

Inflation

Inflation expectations narrowed in 2013 and 2014 and remained unchanged in the longer run. The Fed’s prefers to measure inflation using personal consumption expenditures.

Headline PCE inflation

Central Tendency

2013

2014

2015

2016

Longer run

June projection 0.8 to 1.2 1.4 to 2.0 1.6 to 2.0 n/a 2.0
September projection 1.1 to 1.2 1.3 to 1.8 1.6 to 2.0 1.7 to 2.0 2.0

The Bureau of Labor Statistics reported earlier in the week that the seasonally adjusted Consumer Price Index for All Urban Consumers, or CPI-U, increased by 0.1 percent on the month in August. This was consistent with economist expectations, but the data also mark the continuation of a troubling trend. Inflation has been slowing down over the past few months, which is somewhat concerning given the Fed aggressive stimulus program.

Sep FOMC Inflation

Source: U.S. Federal Reserve

Don’t Miss: 7 Companies That Break the Advertising Bank.