Today, the Fed for the first time released in its forecasts a projection for the fed funds rate and timing for when the next rate move is expected. Overall, the Fed lowered its forecasts for GDP growth, the unemployment rate, and inflation. Regarding the fed funds rate, the average forecast for the rate at the end of 2014 is fractionally over 1 percent. Unexpectedly, at the same time as the release of the forecasts, the Fed essentially announced a long-run inflation target of 2 percent.
"The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances."
Regarding the timing of the next firming in policy, 3 participants indicated it should be in 2012, 3 in 2013, 5 in 2014, 4 in 2015, and 2 in 2016.
FOMC participants generally see 4 to 4.5 percent as the appropriate long-run fed funds rate. Seven indicated 4 percent; six indicated 4.5 percent; three indicated 4.25 percent; and one indicated 3.75 percent.
Central Tendency Forecasts
Change in real GDP
Current projections: 2012: 2.2 to 2.7 percent; 2013: 2.8 to 3.2 percent; 2014: 3.3 to 4.0 percent; longer run: 2.3 to 2.6 percent
November projections: 2012: 2.5 to 2.9 percent; 2013: 3.0 to 3.5 percent; 2014: 3.0 to 3.9 percent; longer run: 2.4 to 2.7 percent
Current projections: 2012: 8.2 to 8.5 percent; 2013: 7.4 to 8.1 percent; 2014: 6.7 to 7.6 percent; longer run: 5.2 to 6.0 percent
November projections: 2012: 8.5 to 8.7 percent; 2013: 7.8 to 8.2 percent; 2014: 6.8 to 7.7 percent; longer run: 5.2 to 6.0 percent
Current projections: 2012: 1.4 to 1.8 percent; 2013: 1.4 to 2.0 percent; 2014: 1.6 to 2.0 percent; longer run: 2.0 percent
November projections: 2012: 1.4 to 1.8 percent; 2013: 1.5 to 2.0 percent; 2014: 1.5 to 2.0 percent; longer run: 1.7 to 2.0 percent
Core PCE inflation
Current projections: 2012: 1.5 to 1.8 percent; 2013: 1.5 to 2.0 percent; 2014: 1.6 to 2.0 percent; longer run: NA
November projections: 2012: 1.5 to 2.0 percent; 2013: 1.4 to 1.9 percent; 2014: 1.5 to 2.0 percent; longer run: NA
The Fed now releases economic projections four times a year (March, June, September, and December). Traditionally, the Fed forecasts covered GDP, the PCE price index, and the civilian unemployment rate. However, the forecast report additionally now includes forecasts for the appropriate timing of the next change in the fed funds rate and the expected fed funds rate at the end of the next two years. As of March 20, 2013, the forecasts are released at the same time as the FOMC statement which is 2:00 p.m. ET and 30 minutes prior to the Fed chairman’s press conference which addresses the forecasts and Fed policy in general. The forecasts are a composite of individual forecasts by each Fed governor and each District president and cover two to three years out on an annual basis. The GDP, inflation, and unemployment numbers are published as a “central tendency” and also as a range. The central tendency is an average of the forecasts after the highest and lowest forecasts are removed. The range shows the highest and lowest forecasts for these indicators.
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