Summary of Economic Projections
Along with its monetary policy statement, the FOMC (Federal Open Market Committee) releases the SEP (Summary of Economic Projections) in four of the scheduled eight meetings in a year. This additional release is quite significant as it provides the projections of FOMC members on three economic indicators:
- Economic growth
- Unemployment Rate
- PCE (personal consumption expenditures) inflation
The SEP contains both the range of the projections – i.e. the lowest to highest figures projected for an indicator – and the central tendency of the projections which excludes the three highest and three lowest projections for the variables. An addition was made to the SEP from September 2015, from whence the Federal Reserve began adding the median value of their projections as well.
FOMC on economic growth
FOMC members opined that economic activity had been experiencing a moderate pace of growth since mid-2016. This is an improvement from their statements issued in 1H16 in which they had described economic activity as either “slow”, or “modest.”
The SEP showed that the median of the range of expectations for economic growth in 2016 and 2017 had nudged up from the previous SEP released in September. Now, the median on FOMC participants’ projections on US economic growth stands at 1.9% for 2016 and 2.1% for 2017, up from 1.8% and 2.0% respectively a quarter ago.
FOMC on unemployment
FOMC participants were quite positive on the job market front. Job additions have been a bright sport for monetary policymakers except for the surprise dip in May 2016. They expect labor market conditions to continue to improve.
Alike projections on economic growth, FOMC participants’ projections for the unemployment rate were more favorable in December compared to a quarter ago. The median of their projection for the rate stood revised at 4.7% and 4.5% for 2016 and 2017 respectively – a reduction by 0.1 percentage point from the median in September 2016.
FOMC on inflation
Inflation is a key driver for monetary policy. Policymakers at the Federal Reserve consider the price index for personal consumption expenditures (or PCE) to be the “most consistent over the longer run with the US Federal Reserve’s statutory mandate.” The central bank is mandated to keep inflation at the 2% level in the longer-run.
Though the 2% mark has eluded policymakers for quite some time, they are hopeful that improvement in the labor market will help push inflation to the mandated level in the medium-term. The median of expectations for the rise in PCE inflation has risen to 1.5% in the December SEP as compared to 1.3% in the September SEP.
Apart from economic projections, the FOMC also releases the appropriately christened dot-plot. Let’s look at that in the next article.