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Economic Projections from the January FOMC Meeting

Four times a year, we get a glimpse of the Federal Open Market Committee’s (FOMCs) 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).

The newest forecasts were released with the minutes of the January FOMC meeting. At the time of that meeting, incoming data hinted that growth was on firmer footing than had been previously suspected. Notably, data on consumption and industrial production came in stronger than expected. As a result, the Committee shaded up its forecasts for near-term output growth relative to the November meeting, with the central tendency for 2011 real GDP growth rising to a range of 3.4 percent—3.9 percent from November’s estimate of 3.0 percent—3.6 percent. However, forecasts for the medium term were largely unchanged, as Committee members still expect solid above-trend growth for 2012 and 2013.

Figure 1. FOMC Projections: Real GDP

Despite slightly stronger expectations for near-term growth, the Committee’s 2011 unemployment rate forecasts improved only narrowly—with the central tendency ticking down just 0.1 percentage point from a range of 8.9 percent—9.1 percent in November to 8.8 percent—9.0 percent in January. The unemployment rate projections for 2013 now range from 6.8 percent to 7.2 percent, well above the Committee’s longer-run “sustainable rate” projections. Many participants noted that the ongoing (and gradual) labor market recovery may be further restrained by “uneven recovery across sectors” leading to a mismatch between workers and jobs, and relatively strong productivity gains (dampening the need for robust hiring to fuel growth).

Figure 2. FOMC Projections: Unemployment Rate

Committee members continue to expect that inflation will remain at or below their longer-run projections, as readings on underlying inflation continue to come in soft. For example, the Federal Reserve Bank of Cleveland’s Median CPI is up just 0.6 percent on a year-over-year basis. The release noted that many participants expect that high levels of resource slack should continue to apply downward pressure on prices. Moving toward the longer-term outlook, “appropriate monetary policy” combined with well-anchored inflation expectations will likely result in modest inflation rates. Still, the range of forecasts for both headline and core PCE prices over the medium term is little changed from November and remains relatively wide.

Figure 3. FOMC Projections: PCE Inflation
Figure 3. FOMC Projections: Core PCE Inflation

Most participants continued to judge the uncertainty accompanying their projections for all forecasted variables as “elevated” when compared to historical norms. However, the Committee did change its assessment of the risks to its growth and inflation projections. The majority of Committee members now judge the risks to be “balanced,” whereas in November the majority weighted risks to the “downside.” On the upside for growth, some of the participants noted that the recent strength in aggregate spending data might be evidence that a sharper recovery was taking shape (one typical of those that usually follow a deep recession). On the downside, other Committee members noted the continued fragility of the housing market may still adversely affect household spending patterns and bank lending. As for the inflation risks, several participants put a lower probability on further disinflation or outright deflation outcomes, leading to their view of a more balanced distribution of risks.

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