Economic Projections from the June 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 October). 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 June 23-24 showed some signs of stabilization after two quarters of substantial decreases. Notably, financial conditions continued to improve between meetings. The spread between corporate bond yields and comparable Treasury securities diminished considerably between FOMC meetings, not to mention one-month and three-month Libor-OIS spreads narrowed to pre-credit-crisis levels. Some housing-market indicators began to show signs of stabilization (albeit at a relatively low level). However, those signs of stabilization were tempered with continued labor market deterioration, further production cuts, and shedding of excess inventories. Furthermore, FOMC participants noted that “weak economic conditions” in many other countries would likely dampen demand for U.S. exports in the near term.
The Committee’s central tendency is now for the economy to contract on a year-over-year basis in 2009 between -1.5 percent and -1.0 percent, compared to April’s central tendency of -2.0 percent to -1.3 percent. As noted in the Summary Economic Projections section of the release, the path implied by incoming data indicated that growth was less negative than previously expected, and participants continued to expect that the economy would begin to recover in the second half of 2009.
The growth outlook for 2010 and 2011 remained roughly consistent with January’s and April’s projections. Growth in 2010 is expected to be “sluggish,” as household balance sheets and financial conditions are expected to recover only gradually. In 2011, the central tendency is for output to grow above its longer-run trend—increasing between 3.8 percent and 4.6 percent—thus closing some of the gap between potential and actual GDP. The Committee noted that the key factors aiding in the recovery will be a boost from the fiscal stimulus, accommodative monetary policy, and continuing improvement in financial markets.
Reflecting the continued deterioration in the labor market, the Committee’s projections for the unemployment rate grew more pessimistic in June. The range of unemployment rate projections for 2009 jumped up from 9.1 percent to 10.0 percent in April to 9.7 percent to 10.5 percent in June. Importantly, FOMC participants expect the unemployment rate to remain stubbornly high in 2010, as expectations for output growth are not appreciably different than its longer-run trend. Furthermore, it was noted that some participants are concerned about a structural reallocation of labor that could keep the unemployment rate from falling as fast as it otherwise would have. Most participants expect that the unemployment rate will return to a “longer-run sustainable level” between 4.8 percent and 5.0 percent. However, some participants raised their projections of that level, which pushed the upper end of that range from 5.3 percent in April to 6.0 percent in June.
Perhaps one of the more striking changes to the FOMC’s economic projections was the shift in the near-term inflation outlook. Higher-than-expected incoming inflation data, as well as rising oil and commodity prices, were cited by participants as contributing to the upward revision. Most participants now expect PCE inflation in 2009 to be between 1.0 percent and 1.4 percent, up from April’s projection of 0.6 percent to 0.9 percent. Near-term core PCE projections were revised up as well, though not as aggressively. Still, reflecting what the release called “sizable economic slack,” most FOMC participants foresee inflation rates over the medium term falling below their respective longer-run projections. However, it is clear that uncertainty surrounding the inflation projections remains. The June projections of PCE inflation for 2011 range from 0.5 percent to 2.5 percent, a spread of 2.0 percentage points. Moreover, the 2011 range on the less-volatile core PCE measure of inflation reflected a 2.3 percentage point spread.
In the minutes of June’s FOMC meeting, participants noted that the uncertainty was higher than historical norms for all forecasted variables. Interestingly, the majority of respondents viewed the risks around their projections of real GDP and the unemployment rate as “roughly balanced,” compared to a more pessimistic weighting of the risks to the outlook over the past two projections. They pointed to “tentative signs of economic stabilization, indications of some effectiveness of monetary and fiscal policy actions, and improvements in financial conditions” in their assessment of the risks. Many participants also viewed the risks to their inflation projection as “roughly balanced,” while a few participants, according to the release, viewed the risks to their inflation projections to the downside and one saw them to the upside.