Economic Projections from the April FOMC Meeting
The economic projections of the Federal Open Market Committee (FOMC) were released along with the minutes of the meeting on April 27-28. (The Committee’s projections are released four times a year: January, April, June, and November). As usual, the projections were 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 April 27-28 continued to confirm that the economy is in the midst of a nascent recovery, although the pace of recovery is expected to be somewhat slower than average. Notably, private payrolls increased in the first quarter of 2010 for the first time since the fourth quarter of 2007 (when the recession began). Available data suggested that consumer spending had improved more this quarter than in the fourth quarter, when it made modest gains. Manufacturing output jumped 6.3 percent in the first quarter, following a robust 5.5 percent gain in the fourth quarter. However, the data pointed to a bifurcated investment profile, with strong gains in equipment and software investment and continued deep decreases in business fixed investment. Also, data on residential construction pointed to some pullback after a steep run-up prior to the original tax-credit deadline.
The Committee’s current forecasts for economic growth are very similar to those prepared in January, though somewhat higher in the near term, owing to the incorporation of some stronger-than-expected data. In 2010, the central tendency rose from 3.2 percent to 3.7 percent, an upward shift of roughly 0.3-0.4 percentage point. Still, this forecast is somewhat more muted than historical patterns based on the depth of the contraction would suggest. The committee continued to point to “uncertainty” on the part of businesses and households, and “only gradual” labor-market improvements as limiting the pace of the recovery. The central tendency for 2011 and 2012 in the April projections is qualitatively similar to January’s projections. Committee participants noted that “it would take some time” for the economy to “fully converge” to its longer-run trend, though only a few thought that it would take longer than five or six years.
In a move that likely reflected an upward revision to near-term output growth, the Committee shaded down its 2010 projection for unemployment from a central tendency of 9.5-9.7 percent to 9.1-9.5 percent. However, participants’ forecasts still have unemployment remaining stubbornly high in 2012, with a central tendency between 6.6 percent and 7.5 percent, well above the central tendency in the longer-run estimates of 5.0 percent to 5.3 percent.
Committee participants revised down their estimates for Personal Consumption Expenditures (PCE) and core PCE inflation in 2010, as recent readings came in relatively low. In fact, the three-month annualized growth rate in the core PCE price index has been below 1.0 percent since January. Moreover, the release noted that participants, “generally anticipated that inflation would remain subdued over the next several years.” Indeed, the upper bound of the central tendency for core PCE in 2011 and 2012 did decrease relative to January’s projections. However, it is still clear that there is some disagreement among Committee participants, as the range widened to 0.6 percent and 2.4 percent in 2011 and 0.6 percent and 2.2 percent in 2012.
In the minutes of April’s FOMC meeting, most participants noted that uncertainty was higher than historical norms for all forecasted variables, and they generally judged the risks as roughly balanced for output and unemployment. Nearly all Committee participants regarded the risks to their respective inflation forecasts as “balanced,” though there were a couple of participants who weighted the inflation risk to the downside. That said, many participants noted that inflation expectations remained “well-anchored,” offsetting the downward response of inflation to continued economic slack. Others cited a risk that both inflation and inflation expectations may drift upward “especially if extraordinarily accommodative monetary policy measures were not unwound in a timely fashion.”