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Weekly Economic Commentary


January 24-25 FOMC Meeting – Fed Extends Low Rate Forecast to 2014

January 25, 2012

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The latest forward guidance from the Fed is that exceptionally low levels of the federal funds rate will prevail at least through late 2014. There was one dissent, with President Lacker of the Richmond Federal Reserve preferring to eliminate the description of the time period over which the federal funds rate would be left unchanged. The Fed changed its expectation about tightening to late-2014 from mid-2013 which has been in place since August 2011.

The Fed provided its own forecast of the target federal funds rate for the years 2012 -2014 and also for the longer-run. There is no attribution for the forecasts and all seventeen members of the FOMC (voting and non-voting members) provided their projections, which can be accessed here. Essentially, 11 members do not expect a tightening of monetary policy until 2014 and their forecast ranges from 0.50% -2.75% at year-end 2014. The median of the target federal funds forecast for the forecast period is presented in Chart 1. It should be noted that although 17 members provide the forecast , while only 10 of them are voting members of the FOMC.

DEC 1 25 2012 chart 1

The Fed knocked down its forecast of economic growth a few notches for the entire forecast period (see table below). The Fed sees the economy growing around 2.2%-2.7% in 2012. The Blue Chip consensus forecast of growth in the US is 2.2% on an annual average basis as of January 2012, while the IMF projects growth of 1.5% for the United States in 2012 on a fourth quarter to fourth quarter basis.

The central tendency of the unemployment rate for 2012-2014 was lowered but the longer run projection was left intact. The unemployment rate is expected to be around 8.2% to 8.5% by the end of the year, which is different from the Blue Chip consensus of 8.5% (determined by a survey taken prior to the publication of the December employment report, most likely to be revised down). Inflation is projected to below the Fed’s target of 2.0% until 2014. With regard to inflation, Bernanke formally indicated that 2.0% inflation is the Fed’s target rate and this rate as being consistent with the Fed’s dual mandate. This was part of the Fed’s information made available today which describes at length its dual mandate of price stability and full employment.

The policy statement continues to see the current jobless rate of 8.5% as elevated and the housing sector continues to be depicted as a “depressed sector.” The Fed modified its assessment of global growth to a firmer evaluation of “slowing global growth” from “apparent slowing global growth” in the December statement. In this context, yesterday, the IMF reduced its forecast of global economic growth to 3.25% from 4.0% in September 2011.

DEC 1 25 2012 chart 1a

Source: http://www.federalreserve.gov/newsevents/press/monetary/fomcprojtabl20120125.pdf

In response to questions about a third round of quantitative easing, Bernanke kept the door open and repeatedly noted that if declines in the jobless rate are small and if inflation is below the level that is consistent with the Fed’s dual mandate then a new round of quantitative easing would have to be considered. Chairman Bernanke also noted that qualitative information about the Fed’s outlook for its balance sheet will be provided in the minutes to be published on February 15. Bernanke stressed that the Fed places price stability and full employment on equal footing.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.