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FOMC Preview: More Tapering

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Fed Chairman Ben Bernanke will chair his last FOMC meeting this week on Tuesday and Wednesday. It appears the FOMC will reduce monthly asset purchases by another billion per month, from billion to billion. The weaker than expected December employment report will probably not derail another round of tapering.

Tim Duy at Economist’s View has a warp-up of the recent Fed talk: Fed Watch: The Week That Was. An excerpt:

Bottom Line: The US economy is grinding forward. Policymakers are generally comfortable with the pace of tapering at billion per meeting. That could be reconsidered if we see sustained weakness in future data, but I don’t think that should be the base case. Not everyone is happy at the Fed, however, and arguably the center has shifted toward the hawks as the doves are clearly not pleased that both asset purchases are ending and the Evans rule does not have an heir apparent. I think it is reasonable to believe the primary conflict at the next FOMC meeting is not over asset purchases, but on the communications strategy. The direction and nature of “enhanced forward guidance” is becoming a contentious issue now that the unemployment rate is just a breath away from the 6.5% threshold.
emphasis added

And from Jon Hilsenrath at the WSJ: Next Cut in Fed Bond Buys Looms

The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments.

Here is a look at the most recent projections.  GDP is above projections, the unemployment rate below, and inflation close to projections.  So the data supports additional tapering.

If Q4 GDP comes in at a the consensus (3.0% annualized real growth in Q4), then on a Q4-over-Q4 basis, real GDP will have increased about 2.7% (above the December FOMC projections as shown in the table below).

Note: This is Q4-over-Q4 (what the Fed projects), not real GDP growth for 2013 over 2012 that is probably closer to 2.0%.


GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1 2013 2014 2015 2016
Dec 2013 Meeting Projections 2.2 to 2.3 2.8 to 3.2 3.0 to 3.4 2.5 to 3.2
Sept 2013 Meeting Projections 2.0 to 2.3 2.9 to 3.1 3.0 to 3.5 2.5 to 3.3

1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 6.7% in December.  Although the drop in the labor force participation is a concern, the unemployment rate is below the most recent projections.


Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2 2013 2014 2015 2016
Dec 2013 Meeting Projections 7.0 to 7.1 6.3 to 6.6 5.8 to 6.1 5.3 to 5.8
Sept 2013 Meeting Projections 7.1 to 7.3 6.4 to 6.8 5.9 to 6.2 5.4 to 5.9

2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

It is too early to tell if inflation will start moving back toward the FOMC’s 2% target.  As of November, PCE inflation was up 0.9% from November 2012, and core inflation was up 1.1% (both at the FOMC projections). 


Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1 2013 2014 2015 2016
Dec 2013 Meeting Projections 0.9 to 1.0 1.4 to 1.6 1.5 to 2.0 1.7 to 2.0
Sept 2013 Meeting Projections 1.1 to 1.2 1.3 to 1.8 1.6 to 2.0 1.7 to 2.0


Here are the FOMC’s recent core inflation projections:


Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1 2013 2014 2015 2016
Dec 2013 Meeting Projections 1.1 to 1.2 1.4 to 1.6 1.6 to 2.0 1.8 to 2.0
Sept 2013 Meeting Projections 1.2 to 1.3 1.5 to 1.7 1.7 to 2.0 1.9 to 2.0


Calculated Risk

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