Economic Projections from the November FOMC Meeting
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 November). The projections are based on the information available at the time, as well as participants’ assumptions about the economic factors affecting the outlook and their view of appropriate monetary policy. Appropriate monetary policy is defined as “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’s interpretation of the Federal Reserve’s dual objectives of maximum employment and price stability.”
Data available to FOMC participants on November 3-4 were indicative of a nascent recovery and, quite possibly, the end of one of the most severe postwar recessions on record. Notably, industrial production posted its third consecutive gain in September, which pushed its three-month annualized growth rate up to a strong 12.2 percent. Various housing-market indicators showed signs of a rebound (albeit from relatively low levels). Also, while overall consumer spending reflected the effects of the government’s auto rebates in late July and August, “core” retail sales (excluding autos, building materials, and gasoline sales) showed somewhat surprising strength, rising at annualized rates of 6.7 percent in August and 4.8 percent in September. Indicators of employment conditions continued to point to a soft (but improving) labor market. Nonfarm payroll losses averaged roughly 225, 000 in the third quarter, compared to an average monthly loss of 428,000 in the second quarter. That said, the unemployment rate continued to climb and had reached 9.8 percent at the time of the meeting.
The Committee’s central tendency for economic growth is now for the economy to contract on a year-over-year basis in 2009 between −0.4 percent and −0.1 percent, a dramatic improvement when compared to June’s central tendency of −1.5 percent to −1.0 percent. The growth outlook for 2010 and 2011 remained roughly consistent with projections from the June meeting, as the release noted that the recovery is expected to be “restrained” by a weak labor market, heightened uncertainty among businesses and households, and a “slow waning” of tight credit conditions. Growth in 2010 is expected to be between 2.5 percent and 3.5 percent, which is somewhat less robust than historical patterns would suggest, given the depths of the contraction. In 2011 and 2012 the central tendency is for output to grow above its longer-run trend, thus closing some of the gap between potential and actual GDP. Committee members noted that “over time” the economy would converge to a “sustainable path with real GDP growing at a rate of 2.5 percent to 2.8 percent.”
Given the data available at the time of the meeting, FOMC participants expected the unemployment rate to average between 9.8 percent and 10.3 percent in the fourth quarter of this year, as they noted that recovery in the unemployment rate tends to lag turnarounds in output growth. Unemployment rate projections for 2010 and 2011 were revised down slightly, and the Committee’s central tendency for the unemployment rate in 2012 is 6.8 percent to 7.5 percent. Perhaps the most interesting revision in the November projections from those in June is to the longer-run unemployment rate projections, which were revised up from a range of 4.5 percent—6.0 percent to 4.8 percent—6.3 percent. The release stated, “A number of participants made modest upward revisions to their estimates of the longer-run sustainable rate of unemployment in light of their assessments of the extent to which ongoing structural adjustments would be associated with somewhat higher labor market frictions.”
The Committee’s estimates for PCE inflation for 2009 were broadly similar to its estimates in June. Inflation data for the first half of 2009 was“somewhat lower’ than expected, roughly offset by rising energy prices in the second half of 2009. With just three remaining months of data unknown at the time, most FOMC participants expect core PCE inflation in 2009 to be between 1.4 percent and 1.5 percent. Over the next few years, the Committee expects inflation to “remain subdued,” reflecting a response to “sizeable resource slack.” Importantly, “Many participants stated that well-anchored inflation expectations would play an important role in avoiding further declines in inflation over the next few years.” That said, it is clear that uncertainty surrounding the inflation projections remains. The November projections of headline and core PCE inflation for 2012 range between 0.2 percent and 2.3 percent, a spread of 2.1 percentage points.
In the minutes of November’s FOMC meeting, many participants noted that uncertainty was higher than historical norms for all forecasted variables. The majority of respondents continued to view the risks around their projections of real GDP, inflation, and the unemployment rate as “roughly balanced.” In stating the risks to the inflation outlook, Committee members noted that longer-term inflation expectations may either head lower in response to “persistent economic slack and low inflation outcomes” or “shift upwards in response to a sharper recovery, especially if extraordinary monetary policy stimulus were not unwound in a timely fashion.”