U.S. Federal Reserve

• Summary of Economic Projections shows mild downward revisions to the ranges.
• The overview of Federal Open Market Committee (FOMC) participants’ assessments of appropriate monetary policy shows majority expect policy firming in 2015.
• Today's announcement of additional stimulus measures reflects the Fed's ongoing concern that “without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions.” The updated projections indicate that the majority of participants anticipate that these steps will be sufficient to support a gradual strengthening in economic activity thereby resulting in the unemployment rate falling within the 6.0% to 6.6% range in late 2015. As indicated in the press statement, the numerical guides issued today are in line with the Fed's previous guidance statement that an exceptionally low funds rate target will likely be needed through mid-2015.

The release of the FOMC’s Summary of Economic Projections showed mild downgrades to forecasts for real GDP growth. The central tendency forecast for 2012 real GDP growth is a 1.7% to 1.8% range from the 1.7% to 2.0% range in September (central tendency forecasts excludes the three highest and lowest projections). In 2013, the range widened to 2.3% to 3.0% (from 2.5% to 3.0% in September), and the range for 2014 narrowed to 3.0% to 3.5% from 3.0% to 3.8% previously. These forecasts incorporate each participant’s “assessment of appropriate monetary policy.” Growth is projected in the range between 3.0% to 3.7% for 2015 and the long-run range was maintained at 2.3% to 2.5%.

The forecasted range for the unemployment rate in the fourth quarter of 2012 was lowered to 7.8% to 7.9% to take into account the recent declines. The forecast range for 2013 was lowered to 7.4% to 7.7% from 7.6% to 7.9% in September. The unemployment rate is projected to decline gradually to 6.0% to 6.6% in 2015 signalling the expected timing of when the Fed expects the rate to fall below the 6.5% contained in today's statement. As long as the unemployment rate stands above 6.5%, the statement indicated that the current fed funds rates will likely continue to be appropriate if accompanied by an inflation rate that is no more than 0.5 percentage point above the 2% goal. The Fed maintained its estimate of full-employment when the unemployment rate stands between 5.2% to 6.0%.

Headline inflation is projected to be between 1.6% to 1.7% for 2012 (from 1.7% to 1.8%,) and 1.3% to 2.0% in 2013 (from 1.6% to 2.0%). Longer-run inflation projections were unchanged at 2.0%. The core rate range forecasts were nudged down slightly in 2012 and 2013.

The overview of FOMC participants’ assessments of appropriate monetary policy showed that two members expect rates to rise in 2013. Of the remaining 17 participants, three expect rates to be higher by the end of 2014, 13 participants expected the first move to come in 2015, and the remaining member expects that policy firming would not be warranted until 2016.

Today's announcement of additional stimulus measures reflects the Fed's ongoing concern that “without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions.” The updated projections indicate that the majority of participants anticipate that these steps will be sufficient to support a gradual strengthening in economic activity thereby resulting in the unemployment rate falling within the 6.0% to 6.6% range in late 2015. As indicated in the press statement earlier, the numerical guides issued today are in line with the Fed's previous guidance statement that an exceptionally low funds rate target will likely be needed until mid-2015.

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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