Summary of economic projections
The FOMC (Federal Open Market Committee) releases the SEP (Summary of Economic Projections) in four of the eight scheduled meetings in a year. In it, FOMC members present their projections on three variables:
- economic growth
- unemployment rate
- PCE (personal consumption expenditures) inflation
The SEP presents both the range of the projections (the lowest to highest figures projected for an indicator) and also the central tendency of the projections, which excludes the three highest and three lowest projections for the variables. In September 2015, the Federal Reserve also started adding the median value of its projections as well. Let’s look at PCE inflation expectations first.
The range of FOMC participants’ PCE inflation projections for 2016 fell from 1.3%–2.0% in June to 1.1%–1.7% in September. This is in contrast with the June SEP when inflation expectations actually rose compared to March. Importantly, the central tendency for PCE inflation for 2016 has also decreased while the median has nudged down a bit. The upper end of the central tendency has decreased from 1.7% projected in June to 1.4% in September.
There is no material change in inflation projections for 2017 and 2018.
Core PCE inflation
Unlike PCE inflation, the range of expectations for core PCE inflation for 2016 has shifted higher. Meanwhile, the central tendency and the median of projections remain unchanged.
As observed in the previous article, while inflation was the primary reason why policymakers were united for monetary accommodation for the past two years, it seems to matter little at this point in time. They maintain that the lingering impact of energy prices (TOT) (PTR) (TS) will continue to hold inflation down in the near term. A rise in energy prices will likely fuel inflation and benefit mutual funds like the ClearBridge Aggressive Growth Fund – Class A (SHRAX) and the Fidelity Blue Chip Growth Fund (FBGRX), which have close to a fifth of their assets invested in the energy sector.
These projections show that the earliest policymakers expect inflation to be at their preferred level is 2017. However, 2018 seems more likely. At present, their favorable view of the economy and the job market seems to be driving their decision regarding the timing of the next rate hike.
In the next article, let’s look at projections for the other two variables: economic growth and the unemployment rate.