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Brent Meyer |


Brent Meyer

Brent Meyer is a former economist of the Federal Reserve Bank of Cleveland.


Economic Trends

Economic Projections from the April FOMC Meeting

Brent Meyer

The economic projections of the Federal Open Market Committee (FOMC) are released in conjunction with the minutes of the meetings four times a year (January, April, June, and October). The projections are based on the information available at the time, as well as participants&##8217; assumptions about the economic factors affecting the outlook and their view of appropriate monetary policy. Appropriate monetary policy is defined as &##8220;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&##8217;s interpretation of the Federal Reserve&##8217;s dual objectives of maximum employment and price stability.&##8221;

Data available to FOMC participants on April 28-29 seemed to indicate that a few of the substantial downward trends in the economy were diminishing somewhat. Notably, personal consumption rose modestly in the first quarter, after two consecutive quarterly decreases in excess of 3.5 percent (annualized rate). Also, between the meetings, some housing-market indicators had started to show signs of stabilization (albeit at a relatively low level). On the other hand, the labor market continued to hemorrhage jobs, as factories scrambled to cut production and clear excess inventories. Furthermore, economic and financial conditions in the rest of the world continued to deteriorate in the first quarter, dampening demand for U.S. exports.

The Committee&##8217;s central tendency is now for the economy to contract on a year-over-year basis in 2009 between &##8722;2.0 percent and &##8722;1.3 percent, compared to January&##8217;s central tendency of &##8722;1.3 percent to 0.2 percent. As noted in the FOMC release, the first-quarter data on real GDP was weaker than many participants had expected, contributing to the weaker 2009 growth projections. Conversely, the minutes point out that April&##8217;s projections for the second half of 2009 were revised up from the January meeting.

The Committee noted that the key factors aiding in the recovery will be a boost from the fiscal stimulus, housing-market stabilization, an end of the inventory correction followed by a return to accumulation, and continuing improvement in financial markets. The Committee&##8217;s projections have output growth returning roughly to trend in 2010, before climbing to a central tendency of 3.5 percent to 4.8 percent in 2011&##8212;closing some of the gap between actual and potential GDP. The longer-term (5-6 years out) growth projections remained unchanged from January at the April meeting, ranging between 2.4 percent and 3.0 percent.

Reflecting the rapid deterioration in the employment situation, the Committee&##8217;s projections for the unemployment rate were more pessimistic in April than in January. In fact, even the most optimistic projection jumped up above 9.0 percent in 2009. Most participants now expect that the unemployment rate will rise to between 9.2 percent and 9.6 percent in 2009, and given that most participants&##8217; projections for economic growth are not appreciably above the longer-run trend, the unemployment rate is expected to decline only slightly in 2010. Even &##8220;absent further shocks,&##8221; most participants judge that the unemployment rate will remain stubbornly above its &##8220;longer-run sustainable rate&##8221; through 2011. Some participants noted that the unemployment rate may remain stubbornly high, as resources are shifted away from certain sectors that are experiencing rapid employment losses. Laborers who lose their jobs in these shrinking sectors may need an extended period of time to acquire new skills and education to adapt to working in new sectors.

The Committee&##8217;s inflation projections for the next few years were revised up slightly. It was mentioned in the minutes that the most recent PCE inflation data had come in higher than had been expected at the January meeting. According to the release, many participants continue expect that &##8220;economic slack&##8221; will put downward pressure on prices and wages in the medium term, leading to inflation rates below the longer-run &##8220;appropriate&##8221; level.

It is clear that uncertainty surrounding the inflation projections remains. The April projections of PCE inflation for 2011 range from 0.5 percent to 2.5 percent, a spread of 2.0 percentage points. Also, the range on core PCE inflation widened to 0.2 percent to 2.5 percent in the April projections, compared to 0 percent to 1.8 percent in January.

In the minutes of April&##8217;s FOMC meeting, the participants noted that the uncertainty in their inflation projections was higher than historical norms, though the majority of participants viewed the risks to their inflation outlook as &##8220;roughly balanced.&##8221; This compares to a &##8220;slight majority&##8221; who assessed the risks as balanced in January. That said, some participants noted their concern with the possibility that inflation expectations may head downward in response to relatively low inflation readings. On the other side of that argument were those that saw inflation expectations drifting higher if individuals think that the expansion in the Federal Reserve&##8217;s balance sheet could be difficult to unwind in a &##8220;timely fashion.&##8221;