Author: RBC Financial Group Economics Department

Location: Toronto

Date: 2012-06-21

• Summary of Economic Projections showed downgraded growth forecasts, while the unemployment rate is expected to trend lower at a slower pace. Forecasts for headline and core inflation rates were lowered modestly.
• The overview of Federal Open Market Committee (FOMC) participants’ assessments of appropriate monetary policy showed a broadly unchanged dispersion of the fed funds rate forecasts from the previous release in April 2012.
• Revised forecasts did not alter the Fed’s view that the current, highly stimulative, fed funds target of 0.00% to 0.25% was likely to be warranted “at least through late 2014.”

 

The release of the Federal Open Market Committee’s (FOMC) Summary of Economic Projections showed a general downgrade for the economic outlook, which was in line with the statement released earlier in the day. The central tendency forecast for 2012 real GDP growth was lowered to a 1.9% to 2.4% range from a 2.4% to 2.9% range in April (central tendency forecasts excludes the three highest and lowest projections). In both 2013 and 2014, the growth forecasts were revised downwardly as well; however, the projections still show a gradual acceleration in the pace of growth during the three-year period to 2.2% to 2.8% in 2013 (from 2.7% to 3.1% in April) and to 3.0% to 3.5% in 2014 (from 3.1% to 3.6%).

The forecasted range for the unemployment rate in 2012 was raised to 8.0% to 8.2% from 7.8% to 8.0% in April. As well, the Fed upwardly revised its forecasts for 2013 (to 7.5% to 8.0% from 7.3% to 7.7%) and 2014 (to 7.0% to 7.7% from 6.7% to 7.4%), although it maintained its estimate of the full-employment rate at 5.2% to 6.0%. Inflation projections were revised lower from those seen in April, with the range for overall personal consumption expenditure (PCE) inflation changed to 1.2% to 1.7% for 2012 from 1.9% to 2.0%, while core PCE inflation was revised to 1.7% to 2.0% from 1.8% to 2.0% in April.

The overview of FOMC participants’ assessments of appropriate monetary policy showed a broadly unchanged dispersion of the fed funds rate forecasts from the previous release in April. For 2012, three members expect rate increases by the end of the year (unchanged from April) while the end of year range narrowed to 0.50% to 0.75% from 0.50% and 1.25% previously. In 2013, six members again expect rates to be higher than they are today (unchanged from April) with the range of estimates for year end at 0.50% to 1.75% compared to 0.75% to 1.75% in April. Of the remaining 13 participants (the meeting was the first for newly appointed Governors Stein and Powell), seven expect rates to be higher by the end of 2014, which was unchanged from April’s survey, while six participants expected the first move to come in 2015 (previously four members expected the first hike in 2015).

The changes to the forecast by FOMC participants did not alter the Fed’s bottom line view that economic growth will remain moderate during the near term while the unemployment rate will decline “only slowly” and inflation will run at or below a rate consistent with the Fed’s dual mandate for the medium term. As a result, the Committee reiterated its view that the current, highly stimulative, fed funds rate target of 0.00% and 0.25% will likely be warranted “at least through 2014;” however, the weaker growth outlook prompted the Fed to extend “Operation Twist” until the end of the year.

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.

 

To subscribe or visit go to:  http://www.riskcenter.com