Meet the Author

William Bednar |

Senior Research Analyst

William Bednar

William Bednar is a senior research analyst in the Research Department of the Federal Reserve Bank of Cleveland. He joined the bank in January 2012, and his work focuses on financial economics, macroeconomics, and international economics.

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Meet the Author

John B. Carlson |

Vice President

John B. Carlson

John Carlson is a former vice president and economist in the Research Department at the Federal Reserve Bank of Cleveland. He retired in 2014.

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10.30.12

Economic Trends

The Evolution of the FOMC's Economic Projections in 2012

William Bednar and John Carlson

Along with the September meeting statement, the Federal Open Market Committee (FOMC) also released its updated projections for key economic indicators. This is the fourth set of projections released this year, and by comparing the projections in each of the releases, we can gain an understanding of how FOMC participants’ forecasts for both the near and long-term have changed over the past nine months. The next set of FOMC projections will be released after the December meeting, and beginning in 2013 projections will be released in the third month of every quarter.

The projections include expectations for GDP growth, unemployment, and inflation for the next few years as well as for the longer term Beginning in January of 2012, each participant’s projected path for monetary policy has also been included in order to provide some additional transparency around the FOMC’s decision making. Projections are based on information available at the time the projections are released and each participant’s assumptions about which factors affect movements in the variables The data released for each projected variable include the range, which gives the highest and lowest values of all the forecasts submitted, as well as the central tendency, a measure that omits the three highest and lowest projections and provides a better general idea of the range for the majority of the policymakers’ forecasts.

The forecast for real GDP growth is measured as the four-quarter percentage change in real GDP for the last quarter of each year presented. In September, projections for real GDP growth for 2012 had a central tendency of 1.7 percent to 2.0 percent, compared with 1.9 percent to 2.4 percent in the June forecasts, and 2.2 percent to 2.7 percent back in January. The outlook for next year is less optimistic than it was earlier in the year, as the central tendency of the projections for 2013 has come down from 2.8 percent to 3.2 percent in January to 2.5 percent to 3.0 percent in September.

Forecasts for the 2012 unemployment rate, which is measured as the average unemployment rate for the fourth quarter, had a central tendency in September of 8.0 percent to 8.2 percent. These projections have slightly improved since January, when the central tendency was 8.2 percent to 8.5 percent. Participants’ projections in September for the unemployment rate at the end of 2013 were generally in the range of 7.6 percent to 7.9 percent, which is similar to the central tendency in June and also January, but with a narrower range.

The projections for inflation, measured as the four-quarter percentage change in PCE prices, have generally stayed within a range of 1.5 percent to 2.0 percent in both the next few years and the longer term. Since these projections assume appropriate monetary policy, it would be expected that the inflation forecast would move toward 2.0 percent over time, given that it is the current inflation target. This expectation seems to be generally represented in these projections. However, the near-term projection for the end of 2012 did vary quite a bit across the projection releases, reflecting in part the volatility of oil prices. The central tendency was at 1.4 percent to 1.8 percent in January, 1.9 percent to 2.0 percent in April, and 1.2 percent to 1.7 percent in June, and 1.7 percent to 1.8 percent in September.

The Committee’s longer-term projections are generally the values to which each FOMC participant expects the indicators to converge over an extended period of time, absent any unanticipated shocks to the economy. The range of longer-term projections remained pretty consistent across projection releases, with only some small deviations. One notable change was an expansion of the full range of long-term unemployment expectations, which widened from 5.0 percent to 6.0 percent in January to 5.0 to 6.3 percent in September.

FOMC Projections: Longer Term

 

Central tendency, percent

Range

 

January

April

June

September

January

April

June

September

Percent change in GDP

2.3–2.6

2.3–2.6

2.3–2.5

2.3–2.5

2.2–3.0

2.2–3.0

2.2–3.0

2.2–3.0

Unemployment rate

5.2–6.0

5.2–6.0

5.2–6.0

5.2–6.0

5.0–6.0

4.9–6.0

4.9–6.3

5.0–6.3

PCE inflation

2.0–2.0

2.0–2.0

2.0–2.0

2.0–2.0

2.0–2.0

2.0–2.0

2.0–2.0

2.0–2.0

 

Since the beginning of this year, FOMC participants have also submitted their expectations for the optimal path of future monetary policy given their projections of the other economic indicators. Specifically, they release their forecasts of the appropriate level of the target federal funds rate for the next few years and the long run, as well as their projections for the likely timing of the first increase in the target rate given their view of the economy. The participants’ projections of the timing of policy firming have shifted throughout the course of the year. While a majority of participants expected that rates would need to be increased sometime in 2014 in the January, April, and June releases, most now expect that this should happen sometime in 2015 instead. This change coincides with the language in the most recent FOMC statement, which said that “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”