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Brent Meyer |


Brent Meyer

Brent Meyer is a former economist of the Federal Reserve Bank of Cleveland.


Economic Trends

Economic Projections from the January FOMC Meeting

Brent Meyer

The economic projections of the FOMC (Federal Open Market Committee) are released in conjunction with the meeting minutes four times a year (January, April, June, and October). The projections are made by the participants of the FOMC meeting and are based on all pertinent information available at the time, each participant’s assumptions about the economic factors affecting the outlook, and each participant’s view of appropriate monetary policy. “Appropriate monetary policy,” according to the press release  for the January 2009 meeting, “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.”

Economic conditions between the release of the October and January projections have deteriorated considerably. The credit crisis intensified, the employment situation darkened, the NBER announced that we are indeed officially in a recession, and virtually every indicator of economic health worsened. At its October 2008 meeting, the FOMC cut the federal funds rate target by 50 basis points, lowering it to 1.5 percent. By December, the Committee had slashed the target rate to a range of 0.0 percent to 0.25 percent and embarked on an aggressive and unprecedented path of monetary policy called “credit-easing.”

The weaker near-term outlook is reflected in the FOMC’s projections for economic growth in 2009. The Committee’s central tendency is now for the economy to contract in 2009 between −0.5 percent and −1.3 percent, compared to October’s central tendency of −0.2 percent to 1.1 percent. Even more striking is the fact that the most optimistic projection (the top end of the range) in 2009 is for real GDP to eke out a 0.2 percent gain.

The central view is for aggregate output to decline throughout the first half of the year, likely driven by further declines in consumer spending, as individuals struggle with labor market weakness, tight credit markets, and deteriorating asset prices. Meeting participants also anticipated some form of fiscal stimulus as well as other measures that would help support a return to normally functioning credit markets. At the time the projections were generated, however, the details of such measures were not complete. Now that they are known, further revisions may result, but these will be reflected in the next forecast period. Furthermore, most of the participants regarded the uncertainty around this forecast to be greater than historical norms and judged the risks to growth to be weighted to the downside.

Nonfarm payrolls have been slashed by roughly 1.8 million in the past three months (November, December, and January), and the Committee now expects labor market weakness to continue throughout 2009. Reflecting the speed at which the employment situation has deteriorated, the low end of the range in January’s projections for unemployment rose to 8.0 percent from October’s projections, equal to the Committee’s most pessimistic forecast in October. Most participants now expect that the unemployment rate will rise to between 8.5 percent and 8.8 percent in 2009, and given that most participants’ projections for economic growth are not appreciably above the longer-run trend, the unemployment rate is expected only to decline slightly in 2010. Even “absent further shocks,” most participants judge that the unemployment rate will remain stubbornly above its “longer-run sustainable rate” through 2011.

After reaching a 17-year high in July 2008, the 12-month growth rate in the CPI fell to 0.1 percent in December 2008, driven in large part by rapidly decreasing energy and commodity prices. According to the minutes of the December FOMC meeting, the speed of the price declines came as somewhat of a surprise to the meeting participants, prompting them to further revise down their projections for near-term inflation. Moreover, expected weakness in consumer spending and a substantial amount of resource slack that will be generated from the near-term decrease in aggregate output is serving to dampen participants’ projections of price pressures throughout the forecast period.

It is clear that uncertainty surrounding the inflation projections has increased. The January projections of PCE inflation for 2011 range from 0.2 percent to 2.1 percent, compared to 0.8 percent to 1.8 percent in October. Also, the range on core PCE inflation widened to 0.0 percent to 1.8 percent in the January projections. In the minutes of January’s FOMC meeting, the participants noted that the uncertainty in their inflation projections was higher than historical norms, and that some of that uncertainty was due to the uncertain paths of commodity and energy prices, which in turn were due to the increasingly unclear prospects for global growth.

There was some disagreement about the balance of inflation risks, as the minutes indicate that a “slight majority” assessed the risks as balances, while the remainder viewed them to the downside. That said, the uncertainty surrounding the participants’ inflation projections is most likely coupled to the elevated uncertainty surrounding their output growth projections.

There is an interesting innovation in the release of January’s minutes, and that is the inclusion of a longer-run forecast (5-6 years out). The central tendency of the participants’ projections is for the longer-run trend in real GDP to increase between 2.5 percent and 2.7 percent and the unemployment rate to fall to between 4.8 percent and 5.0 percent. Also, the FOMC meeting participants judge that total PCE inflation will range between 1.5 percent and 2.0 percent, with a central tendency of 1.7 percent to 2.0 percent in the longer run. These forecasts are made with the assumptions of “appropriate monetary policy” and no further economic shocks. Accordingly, the estimates can be viewed as what the participants assume for longer-run sustainable economic growth and unemployment, as well as an inflation rate that is consistent with price stability.

FOMC: Longer-Run Projections

Central tendency
Real GDP growth
2.5 to 2.7
2.4 to 3.0
Unemployment rate
4.8 to 5.0
4.35 to 5.5
Total PCE inflation
1.7 to 2.0
1.5 to 2.0

Source: Federal Reserve Board.