Economic Projections from the June FOMC Meeting
Four times a year, we get a glimpse of the Federal Open Market Committee’s (FOMC) forecasts for economic growth, unemployment, and inflation. The projections take into account all the available data at the time, assumptions about key economic factors, and each participant’s view of the appropriate monetary policy that will satisfy the Fed’s dual mandate (maximum sustainable employment and price stability).
Data available to FOMC participants on June 22–23 continued to point toward recovery, albeit at a pace that is expected to be somewhat slower than an average recovery. Developments since the April meeting suggested that growth will be slightly weaker over the near term. Notably, sovereign debt problems in the euro area contributed to a dollar appreciation in foreign exchange markets and were linked to roughly an 8 percent decrease in equity prices. That said, domestic data were still coming in relatively strong as of the meeting. The three-month annualized growth rate in industrial production through May was 9.4 percent, and personal consumption expenditures had risen 3.0 percent in the first quarter. However, private payrolls, which had increased by roughly 450,000 through the first four months of the year, rose just 41,000 in May, according to the initial estimate (disappointing private forecasters’ expectations). Still, both hours and earnings were trending higher through May.
The Committee’s forecasts for output growth were revised down at the June meeting relative to its projections in April. These revisions largely affected near-term growth, as the 2012 and longer-term projections were largely unchanged. In 2010, the central tendency for output growth is between 3.0 percent and 3.5 percent, a downward shift of roughly 0.2 percentage point. In 2011, the forecast is qualitatively similar except for a modest (0.3 percentage point) decrease in the upper end of the central tendency—from 4.5 percent to 4.2 percent in June. The overall pattern of recovery in these projections is somewhat more muted than the force of history would suggest, given the depth of the contraction. 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.
Likely reflecting the relatively weaker near-term growth profile, the Committee shaded up its already dour unemployment rate projections through 2012. The unemployment rate projections for 2012 now range from 6.8 percent to 7.9 percent, well above the Committee’s longer-run “sustainable rate” projections. Those longer-run estimates remained unchanged, though the release noted that a few Committee members were “concerned” that underlying structural adjustments may have edged down longer-term “sustainable” employment levels.
Committee members revised down their estimates for PCE and core PCE inflation through 2012, likely reflecting continued low readings on underlying inflation trends and downward revisions to unit labor costs and compensation estimates. The release noted that participants “generally anticipated that inflation would remain subdued over the next several years.” Indeed, the central tendency for core PCE in 2011 and 2012 did decrease relative to April’s projections. However, it is still clear Committee members disagree, as the range remained relatively large in 2011 (from 0.6 percent and 2.4 percent) and widened to between 0.4 percent and 2.2 percent in 2012.
The release noted that most participants judged that uncertainty remained elevated for all forecasted variables, compared to historical norms. In April, a “large majority” saw the risks to their growth projections as “balanced,” but that has since shifted. In June, roughly half of the Committee members judged that the risks are to the “downside.” With respect to their inflation forecasts, most Committee members regarded the risks to their individual forecasts as “balanced” in June. While current underlying inflation trends have been “subdued,” many participants noted that inflation expectations remained “well-anchored,” likely offsetting the downward response of inflation to continued economic slack. In April, the release highlighted the possibility that inflation expectations could increase, “especially if extraordinarily accommodative monetary policy measures were not unwound in a timely fashion.” In an interesting reversal, June’s release cited the risk that inflation expectations “might start to decline in response to persistently low levels of actual inflation” and continued economic slack.