Part 3: Summary of Economic Projections
Monetary Policy Report submitted to the Congress on July 13, 2018, pursuant to section 2B of the Federal Reserve Act
The following material appeared as an addendum to the minutes of the June 12-13, 2018, meeting of the Federal Open Market Committee.
In conjunction with the Federal Open Market Committee (FOMC) meeting held on June 12-13, 2018, meeting participants submitted their projections of the most likely outcomes for real gross domestic product (GDP) growth, the unemployment rate, and inflation for each year from 2018 to 2020 and over the longer run.17 Each participant's projections were based on information available at the time of the meeting, together with his or her assessment of appropriate monetary policy--including a path for the federal funds rate and its longer-run value--and assumptions about other factors likely to affect economic outcomes. The longer-run projections represent each participant's assessment of the value to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy.18 "Appropriate monetary policy" is defined as the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her individual interpretation of the statutory mandate to promote maximum employment and price stability.
All participants who submitted longer-run projections expected that, in 2018, real GDP would expand at a pace exceeding their individual estimates of the longer-run growth rate of real GDP. Participants generally saw real GDP growth moderating somewhat in each of the following two years but remaining above their estimates of the longer-run rate. All participants who submitted longer-run projections expected that, throughout the projection period, the unemployment rate would run below their estimates of its longer-run level. All participants projected that inflation, as measured by the four-quarter percentage change in the price index for personal consumption expenditures (PCE), would run at or slightly above the Committee's 2 percent objective by the end of 2018 and remain roughly flat through 2020. Compared with the Summary of Economic Projections (SEP) from March, most participants slightly marked up their projections of real GDP growth in 2018 and somewhat lowered their projections for the unemployment rate from 2018 through 2020; participants indicated that these revisions reflected, in large part, strength in incoming data. A large majority of participants made slight upward adjustments to their projections of inflation in 2018. Table 1 and figure 1 provide summary statistics for the projections.
As shown in figure 2, participants generally continued to expect that the evolution of the economy relative to their objectives of maximum employment and 2 percent inflation would likely warrant further gradual increases in the federal funds rate. The central tendencies of participants' projections of the federal funds rate for both 2018 and 2019 were roughly unchanged, but the medians for both years were 25 basis points higher relative to March. Nearly all participants who submitted longer-run projections expected that, during part of the projection period, evolving economic conditions would make it appropriate for the federal funds rate to move somewhat above their estimates of its longer-run level.
In general, participants continued to view the uncertainty attached to their economic projections as broadly similar to the average of the past 20 years. As in March, most participants judged the risks around their projections for real GDP growth, the unemployment rate, and inflation to be broadly balanced.
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, June 2018
|Variable||Median1||Central tendency2||Range 3|
|Change in real GDP||2.8||2.4||2.0||1.8||2.7 - 3.0||2.2 - 2.6||1.8 - 2.0||1.8 - 2.0||2.5 - 3.0||2.1 - 2.7||1.5 - 2.2||1.7 - 2.1|
|March projection||2.7||2.4||2.0||1.8||2.6 - 3.0||2.2 - 2.6||1.8 - 2.1||1.8 - 2.0||2.5 - 3.0||2.0 - 2.8||1.5 - 2.3||1.7 - 2.2|
|Unemployment rate||3.6||3.5||3.5||4.5||3.6 - 3.7||3.4 - 3.5||3.4 - 3.7||4.3 - 4.6||3.5 - 3.8||3.3 - 3.8||3.3 - 4.0||4.1 - 4.7|
|March projection||3.8||3.6||3.6||4.5||3.6 - 3.8||3.4 - 3.7||3.5 - 3.8||4.3 - 4.7||3.6 - 4.0||3.3 - 4.2||3.3 - 4.4||4.2 - 4.8|
|PCE inflation||2.1||2.1||2.1||2.0||2.0 - 2.1||2.0 - 2.2||2.1 - 2.2||2.0||2.0 - 2.2||1.9 - 2.3||2.0 - 2.3||2.0|
|March projection||1.9||2.0||2.1||2.0||1.8 - 2.0||2.0 - 2.2||2.1 - 2.2||2.0||1.8 - 2.1||1.9 - 2.3||2.0 - 2.3||2.0|
|Core PCE inflation 4||2.0||2.1||2.1||1.9 - 2.0||2.0 - 2.2||2.1 - 2.2||1.9 - 2.1||2.0 - 2.3||2.0 - 2.3|
|March projection||1.9||2.1||2.1||1.8 - 2.0||2.0 - 2.2||2.1 - 2.2||1.8 - 2.1||1.9 - 2.3||2.0 - 2.3|
|Memo: Projected appropriate policy path|
|Federal funds rate||2.4||3.1||3.4||2.9||2.1 - 2.4||2.9 - 3.4||3.1 - 3.6||2.8 - 3.0||1.9 - 2.6||1.9 - 3.6||1.9 - 4.1||2.3 - 3.5|
|March projection||2.1||2.9||3.4||2.9||2.1 - 2.4||2.8 - 3.4||3.1 - 3.6||2.8 - 3.0||1.6 - 2.6||1.6 - 3.9||1.6 - 4.9||2.3 - 3.5|
Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant's projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. The March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 20-21, 2018. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate in conjunction with the March 20-21, 2018, meeting, and one participant did not submit such projections in conjunction with the June 12-13, 2018, meeting.
1. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. Return to table
2. The central tendency excludes the three highest and three lowest projections for each variable in each year. Return to table
3. The range for a variable in a given year includes all participants' projections, from lowest to highest, for that variable in that year. Return to table
4. Longer-run projections for core PCE inflation are not collected. Return to table
The Outlook for Economic Activity
The median of participants' projections for the growth rate of real GDP, conditional on their individual assessments of appropriate monetary policy, was 2.8 percent for this year and 2.4 percent for next year. The median was 2.0 percent for 2020, a touch above the median projection of longer-run growth. Most participants continued to cite fiscal policy as a driver of strong economic activity over the next couple of years. Many participants also mentioned accommodative monetary policy and financial conditions, strength in the global outlook, continued momentum in the labor market, or positive readings on business and consumer sentiment as important factors shaping the economic outlook. Compared with the March SEP, the median of participants' projections for the rate of real GDP growth was 0.1 percentage point higher for this year and unchanged for the next two years.
Almost all participants expected the unemployment rate to decline somewhat further over the projection period. The median of participants' projections for the unemployment rate was 3.6 percent for the final quarter of this year and 3.5 percent for the final quarters of 2019 and 2020. The median of participants' estimates of the longer-run unemployment rate was unchanged at 4.5 percent.
Figure 3.A and figure 3.B show the distributions of participants' projections for real GDP growth and the unemployment rate from 2018 to 2020 and over the longer run. The distribution of individual projections for real GDP growth this year shifted up noticeably from that in the March SEP. By contrast, the distributions of projected real GDP growth in 2019 and 2020 and over the longer run were little changed. The distributions of individual projections for the unemployment rate in 2018 to 2020 shifted down relative to the distributions in March, while the downward shift in the distribution of longer-run projections was very modest.
The Outlook for Inflation
The medians of participants' projections for total and core PCE price inflation in 2018 were 2.1 percent and 2.0 percent, respectively, and the median for each measure was 2.1 percent in 2019 and 2020. Compared with the March SEP, the medians of participants' projections for total PCE price inflation for this year and next were revised up slightly. Some participants pointed to incoming data on energy prices as a reason for their upward revisions. The median of participants' forecasts for core PCE price inflation was up a touch for this year and unchanged for subsequent years.
Figure 3.C and figure 3.D provide information on the distributions of participants' views about the outlook for inflation. The distributions of both total and core PCE price inflation for 2018 shifted to the right relative to the distributions in March. The distributions of projected inflation in 2019, 2020, and over the longer run were roughly unchanged. Participants generally expected each measure to be at or slightly above 2 percent in 2019 and 2020.
Appropriate Monetary Policy
Figure 3.E provides the distribution of participants' judgments regarding the appropriate target--or midpoint of the target range--for the federal funds rate at the end of each year from 2018 to 2020 and over the longer run. The distributions of projected policy rates through 2020 shifted modestly higher, consistent with the revisions to participants' projections of real GDP growth, the unemployment rate, and inflation. As in their March projections, a large majority of participants anticipated that evolving economic conditions would likely warrant the equivalent of a total of either three or four increases of 25 basis points in the target range for the federal funds rate over 2018. There was a slight reduction in the dispersion of participants' views, with no participant regarding the appropriate target at the end of the year to be below 1.88 percent. For each subsequent year, the dispersion of participants' year-end projections was somewhat smaller than that in the March SEP.
The medians of participants' projections of the federal funds rate rose gradually to 2.4 percent at the end of this year, 3.1 percent at the end of 2019, and 3.4 percent at the end of 2020. The median of participants' longer-run estimates, at 2.9 percent, was unchanged relative to the March SEP.
In discussing their projections, many participants continued to express the view that the appropriate trajectory of the federal funds rate over the next few years would likely involve gradual increases. This view was predicated on several factors, including a judgment that a gradual path of policy firming likely would appropriately balance the risks associated with, among other considerations, the possibilities that U.S. fiscal policy could have larger or more persistent positive effects on real activity and that shifts in trade policy or developments abroad could weigh on the expansion. As always, the appropriate path of the federal funds rate would depend on evolving economic conditions and their implications for participants' economic outlooks and assessments of risks.
Uncertainty and Risks
In assessing the path for the federal funds rate that, in their view, is likely to be appropriate, FOMC participants take account of the range of possible economic outcomes, the likelihood of those outcomes, and the potential benefits and costs should they occur. As a reference, table 2 provides measures of forecast uncertainty, based on the forecast errors of various private and government forecasts over the past 20 years, for real GDP growth, the unemployment rate, and total PCE price inflation. Those measures are represented graphically in the "fan charts" shown in the top panels of figure 4.A, figure 4.B, and figure 4.C.. The fan charts display the median SEP projections for the three variables surrounded by symmetric confidence intervals derived from the forecast errors reported in table 2. If the degree of uncertainty attending these projections is similar to the typical magnitude of past forecast errors and the risks around the projections are broadly balanced, then future outcomes of these variables would have about a 70 percent probability of being within these confidence intervals. For all three variables, this measure of uncertainty is substantial and generally increases as the forecast horizon lengthens.
Table 2. Average historical projection error ranges
|Change in real GDP 1||±1.3||±2.0||±2.1|
|Unemployment rate 1||±0.4||±1.2||±1.8|
|Total consumer prices2||±0.7||±1.0||±1.0|
|Short-term interest rates3||±0.7||±2.0||±2.2|
Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1998 through 2017 that were re- leased in the summer by various private and government forecasters. As described in the box "Forecast Uncertainty," under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, consumer prices, and the federal funds rate will be in ranges implied by the average size of projection errors made in the past. For more information, see David Reifschneider and Peter Tulip (2017), "Gauging the Uncertainty of the Economic Outlook Using His- torical Forecasting Errors: The Federal Reserve's Approach," Finance and Economics Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), www.federalreserve.gov/econresdata/feds/2017/files/2017020pap.pdf.
1. Definitions of variables are in the general note to table 1. Return to table
2. Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projections are percent changes on a fourth quarter to fourth quarter basis. Return to table
3. For Federal Reserve staff forecasts, measure is the federal funds rate. For other forecasts, measure is the rate on 3-month Treasury bills. Projection errors are calculated using average levels, in percent, in the fourth quarter. Return to table
Participants' assessments of the level of uncertainty surrounding their individual economic projections are shown in the bottom-left panels of figures 4.A, 4.B, and 4.C. Nearly all participants viewed the degree of uncertainty attached to their economic projections for real GDP growth, the unemployment rate, and inflation as broadly similar to the average of the past 20 years, a view that was essentially unchanged from March.19
Because the fan charts are constructed to be symmetric around the median projections, they do not reflect any asymmetries in the balance of risks that participants may see in their economic projections. Participants' assessments of the balance of risks to their economic projections are shown in the bottom-right panels of figures 4.A, 4.B, and 4.C. Most participants judged the risks to their projections of real GDP growth, the unemployment rate, total inflation, and core inflation as broadly balanced--in other words, as broadly consistent with a symmetric fan chart. Compared with March, even more participants saw the risks to their projections as broadly balanced. Specifically, for GDP growth, only one participant viewed the risks as tilted to the downside, and the number of participants who viewed the risks as tilted to the upside dropped from four to two. For the unemployment rate, the number of participants who saw the risks as tilted toward low readings dropped from four to two. For inflation, all but one participant judged the risks to either total or core PCE price inflation as broadly balanced.
In discussing the uncertainty and risks surrounding their projections, several participants continued to point to fiscal developments as a source of upside risk, many participants cited developments related to trade policy as posing downside risks to their growth forecasts, and a few participants also pointed to political developments in Europe or the global outlook more generally as downside-risk factors. A few participants noted that the appreciation of the dollar posed downside risks to the inflation outlook. A few participants also noted the risk of inflation moving higher than anticipated as the unemployment rate falls.
Participants' assessments of the appropriate future path of the federal funds rate were also subject to considerable uncertainty. Because the Committee adjusts the federal funds rate in response to actual and prospective developments over time in real GDP growth, the unemployment rate, and inflation, uncertainty surrounding the projected path for the federal funds rate importantly reflects the uncertainties about the paths for those key economic variables. Figure 5 provides a graphical representation of this uncertainty, plotting the median SEP projection for the federal funds rate surrounded by confidence intervals derived from the results presented in table 2. As with the macroeconomic variables, forecast uncertainty surrounding the appropriate path of the federal funds rate is substantial and increases for longer horizons.
The economic projections provided by the members of the Board of Governors and the presidents of the Federal Reserve Banks inform discussions of monetary policy among policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections, however. The economic and statistical models and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future path of the economy can be affected by myriad unforeseen developments and events. Thus, in setting the stance of monetary policy, participants consider not only what appears to be the most likely economic outcome as embodied in their projections, but also the range of alternative possibilities, the likelihood of their occurring, and the potential costs to the economy should they occur.
Table 2 summarizes the average historical accuracy of a range of forecasts, including those reported in past Monetary Policy Reports and those prepared by the Federal Reserve Board's staff in advance of meetings of the Federal Open Market Committee (FOMC). The projection error ranges shown in the table illustrate the considerable uncertainty associated with economic forecasts. For example, suppose a participant projects that real gross domestic product (GDP) and total consumer prices will rise steadily at annual rates of, respectively, 3 percent and 2 percent. If the uncertainty attending those projections is similar to that experienced in the past and the risks around the projections are broadly balanced, the numbers reported in table 2 would imply a probability of about 70 percent that actual GDP would expand within a range of 1.7 to 4.3 percent in the current year, 1.0 to 5.0 percent in the second year, and 0.9 to 5.1 percent in the third year. The corresponding 70 percent confidence intervals for overall inflation would be 1.3 to 2.7 percent in the current year and 1.0 to 3.0 percent in the second and third years. Figures 4.A through 4.C illustrate these confidence bounds in "fan charts" that are symmetric and centered on the medians of FOMC participants' projections for GDP growth, the unemployment rate, and inflation. However, in some instances, the risks around the projections may not be symmetric. In particular, the unemployment rate cannot be negative; furthermore, the risks around a particular projection might be tilted to either the upside or the downside, in which case the corresponding fan chart would be asymmetrically positioned around the median projection.
Because current conditions may differ from those that prevailed, on average, over history, participants provide judgments as to whether the uncertainty attached to their projections of each economic variable is greater than, smaller than, or broadly similar to typical levels of forecast uncertainty seen in the past 20 years, as presented in table 2 and reflected in the widths of the confidence intervals shown in the top panels of figures 4.A through 4.C. Participants' current assessments of the uncertainty surrounding their projections are summarized in the bottom-left panels of those figures. Participants also provide judgments as to whether the risks to their projections are weighted to the upside, are weighted to the downside, or are broadly balanced. That is, while the symmetric historical fan charts shown in the top panels of figures 4.A through 4.C imply that the risks to participants' projections are balanced, participants may judge that there is a greater risk that a given variable will be above rather than below their projections. These judgments are summarized in the lower-right panels of figures 4.A through 4.C.
As with real activity and inflation, the outlook for the future path of the federal funds rate is subject to considerable uncertainty. This uncertainty arises primarily because each participant's assessment of the appropriate stance of monetary policy depends importantly on the evolution of real activity and inflation over time. If economic conditions evolve in an unexpected manner, then assessments of the appropriate setting of the federal funds rate would change from that point forward. The final line in table 2 shows the error ranges for forecasts of short-term interest rates. They suggest that the historical confidence intervals associated with projections of the federal funds rate are quite wide. It should be noted, however, that these confidence intervals are not strictly consistent with the projections for the federal funds rate, as these projections are not forecasts of the most likely quarterly outcomes but rather are projections of participants' individual assessments of appropriate monetary policy and are on an end-of-year basis. However, the forecast errors should provide a sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that would be appropriate to offset the effects of shocks to the economy.
If at some point in the future the confidence interval around the federal funds rate were to extend below zero, it would be truncated at zero for purposes of the fan chart shown in figure 5; zero is the bottom of the lowest target range for the federal funds rate that has been adopted by the Committee in the past. This approach to the construction of the federal funds rate fan chart would be merely a convention; it would not have any implications for possible future policy decisions regarding the use of negative interest rates to provide additional monetary policy accommodation if doing so were appropriate. In such situations, the Committee could also employ other tools, including forward guidance and asset purchases, to provide additional accommodation.
While figures 4.A through 4.C provide information on the uncertainty around the economic projections, figure 1 provides information on the range of views across FOMC participants. A comparison of figure 1 with figures 4.A through 4.C shows that the dispersion of the projections across participants is much smaller than the average forecast errors over the past 20 years.
17. Three members of the Board of Governors were in office at the time of the June 2018 meeting. Return to text
18. One participant did not submit longer-run projections for real GDP growth, the unemployment rate, or the federal funds rate. Return to text
19. At the end of this summary, the box "Forecast Uncertainty" discusses the sources and interpretation of uncertainty surrounding the economic forecasts and explains the approach used to assess the uncertainty and risks attending the participants' projections. Return to text