US Fed Members More Confident About Sustained Economic Recovery

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Thursday, February 17, 2011

The minutes showed what most expected, a modest upward revision to the Fed's forecast for growth in 2011 with the lower end of the band raised to 3.4% from 3.0% or back to where it was at the start of 2010. The upper end of the central tendency forecast band was tweaked up to 3.9% although it remained below the 4.5% upper boundary that was in place in the first half of 2010. This move is in line with the recent changes made by private-sector forecasters with the forecast for 2011 real GDP growth boosted to 3.2% on an annual average basis according to a survey by the Federal Reserve Bank of Philadelphia. This survey indicated that on average, forecasters boosted their projection by 0.7 percentage points relative to the previous survey taken three-months prior. On a fourth-quarter-over-fourth-quarter basis, which is consistent with the Fed forecasts, growth is expected at 3.4%. RBC's forecast remains above the consensus forecast with our annual growth forecast at 3.4% and our fourth-quarter-over-fourth-quarter forecast at 3.9%.

Despite the modest strengthening growth momentum, the minutes highlight that policymakers are still concerned about the slow progress in the labour market and low level of core inflation. On the former point, conditions were said to be "improving gradually" and some business contacts indicated that they were more optimistic about hiring relative to the previous meeting. While there was talk of increased hiring, policymakers indicated disappointment about the pace of employment gains and the uneven improvement in labour markets generally. The central tendency forecasts showed little movement in the unemployment rate, with both the upper and lower boundary reduced by 0.1 percentage point. The 2011 fourth-quarter forecast is for an unemployment rate of 8.8% to 9.0%. On inflation, the minutes indicate less concern about the downside risks to the inflation outlook as well as diminished "odds of a period of deflation." Having said that, the forecast for the headline inflation rate was 1.3% to 1.7% with the core PCE deflator expected within a range of 1.0% to 1.3%. Participants viewed the "large degree of resource slack in the economy" as likely to continue to restrain inflation. 

Today's minutes signify that Fed is feeling more confident that the recovery is proceeding, and it sees the risks to its baseline forecast as "broadly balanced." The list of risks on the downside includes developments in Europe, fiscal tensions at the state and local government level, and the ongoing weakness in the U.S. housing market. On the upside, a more aggressive snap back in demand could produce a recovery that is more in line with history. The bottom line remains that the persistently low level of inflation and high unemployment rate remain foremost in the Fed's sights, and until there is a substantive change in their status, the current policy stance will be maintained. The minutes provided minutiae of the forecast update, and it signals that the policy prescription remains the same as in late 2010. 

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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