Wednesday, September 26, 2018

The September FOMC meeting

Everyone is talking about the FOMC meeting today (well, actually very few people are) as they've raised interest rates and released a statement that has dropped the word "accommodative". For me, the interesting part is in the forecasts [pdf] (which show a slowdown in real GDP (RGDP) over the next few years. Let's compare their forecasts with the dynamic information equilibrium model (DIEM) described in my paper.

First, let's get the dull core PCE inflation forecast out of the way (as always, click to enlarge):

Note: updated with new core PCE data for August 2018 on 1 October 2018.

The dynamic equilibrium over the post-war period is around 1.7% core PCE inflation; the FOMC sees it's own target of 2% as the forecast. The purple points represent the FOMC median and the range. The data in black is the post-forecast data for the DIEM forecast from 2017 (not just here, but in all the graphs below). The white point with a black outline represents the annual average for 2017.

RGDP is similar, but the FOMC sees an obeservable slowdown (given the range of forecasts — i.e. the median drops by more than the range). The DIEM sees most of the fluctuations as noise. Here's the graph (this time the DIEM is in red-orange because reasons):

Note: updated with revised RGDP data 27 September 2018. The change is barely visible [3].

The unemployment forecasts are more complex, and the median FOMC forecast sees the unemployment rate continuing to fall just like the DIEM [1] through 2020 when the former starts a bit of an up-tick (natural rate kicking in). The range of FOMC forecasts see either no up-tick or a larger one. The FOMC forecasts are in light blue and the DIEM annual averages are shown as gray bands:

But then again, the FOMC has been forecasting this slight fall followed by a flattening out or up-tick in a couple years for some time [2]:

Overall, this is a status quo forecast from my perspective. But the continued fall in the unemployment rate is probably puzzling the FOMC — especially given the lack of inflation. I personally couldn't imagine reducing one's unemployment rate forecast almost every meeting since September 2015 and not thinking there's a problem with the model I was using.



[1] Note that the FOMC forecast of comparable vintage to the DIEM forecast (early 2017) was wrong:

[2] So has the FRBSF:

[3] Revised RGDP data became available 27 September 2018; the change is barely visible (RGDP growth was reduced a bit with the revision). The original graph and the updated graph are here for completeness:

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