Economic Projections from the January FOMC Meeting
The economic projections of the Federal Open Market Committee (FOMC) are released in conjunction with the minutes of the meetings four times a year (January, April, June, and November). The projections are based on the information available at the time, as well as participants’ assumptions about the economic factors affecting the outlook and their view of appropriate monetary policy. Appropriate monetary policy is defined as “the future policy that, based on current information, is deemed most likely to foster outcomes for economic activity and inflation that best satisfy the participant’s interpretation of the Federal Reserve’s dual objectives of maximum employment and price stability.”
Data available to FOMC participants on January 26-27 continued to confirm that the economy was in the midst of a nascent recovery, albeit at a pace that is expected to be somewhat slower than an average snapback. Notably, industrial production posted its sixth consecutive gain in December, with an accompanying 6-month annualized growth rate of 9.7 percent. At the time, monthly detail on inventories suggested that the pace of liquidation had slowed dramatically, providing a large contribution to fourth-quarter growth (which looks to be the case, as the advance estimate of real GDP shows that change in private inventories contributed 3.4 percentage points). Moreover, it appeared that businesses were successful at bringing inventory levels better in line with the pace of shipments, promoting the environment for further increases in production (provided demand continues to strengthen).
Consumer spending seemed to hold on to third-quarter gains, even when autos were excluded from calculations. On the other hand, various housing-market indicators exhibited somewhat of a pull-back in the fourth quarter, though this may reflect some pull-back associated with the initial end date for some housing tax incentives. Indicators of employment conditions continued to point to a plodding and uneven improvement in the labor market.
The FOMC members’ current forecasts for economic growth are very similar to November’s. In 2010, just the central tendency tightened up on the lower end—from 2.5 percent to 2.8 percent—with the upper end of the central tendency remaining at 3.5 percent. Given the depth of the contraction, historical patterns would suggest appreciably higher growth in 2010 (the so-called “v-shaped” recovery). The committee pointed to “elevated uncertainty” on the part of businesses and households, and “very slow” labor-market improvements as limiting factors in the pace of recovery.
January’s central tendency for 2011 and 2012 is qualitatively similar to November’s projections. The Committee’s forecast in the out years is for output to grow above its longer-run trend, thus closing some of the gap between potential and actual GDP. Committee members noted that “over time” the economy would converge to a “sustainable path with real GDP growing at a rate of 2.5 percent to 2.8 percent.”
FOMC members’ current projections for the unemployment rate are virtually unchanged from November, except for a slightly narrower central tendency for 2010 and a marginally wider tendency for 2012. The Committee noted that, “labor market conditions would improve only slowly over the next several years” before settling between 4.9 percent and 6.3 percent in the longer run. However, some participants suggested that underlying structural adjustments are adding “considerable uncertainty” to those projections.
FOMC members’ estimates for PCE inflation for 2010 were slightly higher than in November, in part reflecting increases in energy prices. Interestingly, the 2012 range of PCE estimates tightened up considerably from November to January. The release noted that the prospects for global output growth may push energy prices higher over the medium term. That said, the Committee still anticipates a “subdued” path for inflation over the outlook period. Rationale for the restrained inflation path centered on relatively low rates of resource utilization (helping to hold down cost pressures), which are anticipated to be tempered by stable inflation expectations. As evidence, the central tendency for core PCE inflation ticked up slightly in January, from 1.0-1.7 percent to 1.2-1.9 percent. However, the release noted that is still slightly below the “mandate-consistent” inflation rate accepted by most members of the Committee.
In the minutes of January’s FOMC meeting, “nearly all” participants noted that uncertainty was higher than historical norms for all forecasted variables. The majority of respondents continued to view the risks around their projections of real GDP, inflation, and the unemployment rate as “roughly balanced.” In stating the risks to the inflation outlook, Committee members noted that longer-term inflation expectations may either head lower in response to continued economic slack and “persistently low inflation,” or drift upward, “especially if extraordinarily accommodative monetary policy measures were not unwound in a timely fashion.”