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Economic Projections from the November FOMC Meeting

Four times a year, we get a glimpse of the Federal Open Market Committee’s 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 Committee’s forecasts for near-term output growth were revised down sharply from its June meeting to its November meeting. However, much of this deterioration in the outlook was likely due to the Bureau of Economic Analysis’s annual benchmark revision in July, which revealed that the recovery was on a weaker footing than previously thought.

The range across Committee participants’ forecasts for 2010 also tightened up considerably, in part because there is just one quarter of “unknown” data left for the year (assuming no further revisions to the third quarter). The November forecast for 2011 was also marked down relative to the June forecast, as participants noted that the several factors including ongoing housing market strain, credit conditions at banks, and financial hardships on the part of states and municipalities were restraining overall growth. That said, real GDP growth is expected to rise above its longer-run trend of roughly 3.0 percent in 2011 and stay there through 2013. Nevertheless, the overall pattern of recovery in these projections is somewhat more muted than typical, given the depth of the contraction.

FOMC Projections: Real GDP

Likely reflecting the relatively weaker near-term growth profile, the Committee marked up its already dour unemployment rate projections through 2012. Participants noted that part of the upward revision in their expected path for the unemployment rate reflected some stubborn lack of improvement in the near-term data. The unemployment rate projections for 2012 now range from 7.0 percent to 8.7 percent, well above the Committee’s longer-run “sustainable rate” projections. Those range of these longer-run estimates across participants widened at the November meeting, as some viewed underlying structural adjustments as more persistent over the longer-run than others.

FOMC Projections: Unemployment Rate

Committee members shaded up their projections for PCE and core PCE inflation through 2012, even amid continued low readings on underlying inflation. The Federal Reserve Bank of Cleveland’s Median CPI is up just 0.5 percent on a year-over-year basis and has been trending below 1.0 percent for most of the year. The statement accompanying the data’s release noted that despite high levels of resource slack, “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 in 2013 is relatively wide. In fact, projections for core PCE inflation in 2013 range between 0.5 percent and 2.0 percent. Also, the lower end of the central tendency for the longer-run projections of total PCE inflation widened slightly—from 1.7 percent to 1.6 percent.

FOMC Projections: PCE Inflation
FOMC Projections: Core PCE Inflation

The statement released after the November meeting noted that most participants judged that uncertainty remained elevated for all forecasted variables, compared to historical norms. A “majority” of the participants saw the risks to their growth projections as “balanced,” though there are still “many” who have weighted the risks to the downside. Most of the Committee participants regarded the risks to their respective inflation forecasts as “balanced” as well. Still, there was some disagreement about the risks, with “some” judging that downside risks remain and “a couple” of participants who were more concerned about the upside risks to their respective inflation projections.

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