Part 3: Summary of Economic Projections
Monetary Policy Report submitted to the Congress on February 22, 2019, pursuant to section 2B of the Federal Reserve Act
The following material appeared as an addendum to the minutes of the December 18-19, 2018, meeting of the Federal Open Market Committee.
In conjunction with the Federal Open Market Committee (FOMC) meeting held on December 18-19, 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 2021 and over the longer run.19 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.20 "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, under appropriate monetary policy, growth in real GDP in 2019 would run somewhat above their individual estimate of its longer-run rate. Most participants continued to expect real GDP growth to slow throughout the projection horizon, with a majority of participants projecting growth in 2021 to be a little below their estimate of its longer-run rate. Almost all participants who submitted longer-run projections continued to expect that the unemployment rate would run below their estimate of its longer-run level through 2021. Most participants projected that inflation, as measured by the four-quarter percentage change in the price index for personal consumption expenditures (PCE), would increase slightly over the next two years, and nearly all participants expected that it would be at or slightly above the Committee's 2 percent objective in 2020 and 2021. Compared with the Summary of Economic Projections (SEP) from September, many participants marked down slightly their projections for real GDP growth and inflation in 2019. 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 some further gradual increases in the federal funds rate. Compared with the September submissions, the median projections for the federal funds rate for the end of 2019 through 2021 and over the longer run were a little lower. Most participants expected that the federal funds rate at the end of 2020 and 2021 would be modestly higher than their estimate of its level over the longer run; however, many marked down the extent to which it would exceed their estimate of the longer-run level relative to their September projections.
On balance, participants continued to view the uncertainty around their projections as broadly similar to the average of the past 20 years. While most participants viewed the risks to the outlook as balanced, a couple more participants than in September saw risks to real GDP growth as weighted to the downside, and one less participant viewed the risks to inflation as weighted to the upside.
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, December 2018
|Variable||Median 1||Central tendency2||Range 3|
|Change in real GDP||3.0||2.3||2.0||1.8||1.9||3.0-3.1||2.3-2.5||1.8-2.0||1.5-2.0||1.8-2.0||3.0-3.1||2.0-2.7||1.5-2.2||1.4-2.1||1.7-2.2|
|Core PCE inﬂation 4||1.9||2.0||2.0||2.0||1.8-1.9||2.0-2.1||2.0-2.1||2.0-2.1||1.8-1.9||1.9-2.2||2.0-2.2||2.0-2.3|
|Memo: Projected appropriate policy path|
|Federal funds rate||2.4||2.9||3.1||3.1||2.8||2.4||2.6-3.1||2.9-3.4||2.6-3.1||2.5-3.0||2.1-2.4||2.4-3.1||2.4-3.6||2.4-3.6||2.5-3.5|
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 September projections were made in conjunction with the meeting of the Federal Open Market Committee on September 25-26, 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 September 25-26, 2018, meeting, and one participant did not submit such projections in conjunction with the December 18-19, 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 for 2019, conditional on their individual assessment of appropriate monetary policy, was 2.3 percent, slower than the 3.0 percent pace expected for 2018. Most participants continued to expect GDP growth to slow throughout the projection horizon, with the median projection at 2.0 percent in 2020 and at 1.8 percent in 2021, a touch lower than the median estimate of its longer-run rate of 1.9 percent. Relative to the September SEP, the medians of the projections for real GDP growth for 2018 and 2019 were slightly lower, while the median for the longer-run rate of growth was a bit higher. Several participants mentioned tighter financial conditions or a softer global economic outlook as factors behind the downward revisions to their near-term growth estimates.
The median of projections for the unemployment rate in the fourth quarter of 2019 was 3.5 percent, unchanged from the September SEP and almost 1 percentage point below the median assessment of its longer-run normal level. With participants generally continuing to expect the unemployment rate to bottom out in 2019 or 2020, the median projections for 2020 and 2021 edged back up to 3.6 percent and 3.8 percent, respectively. Nevertheless, most participants continued to project that the unemployment rate in 2021 would still be well below their estimates of its longer-run level. The median estimate of the longer-run normal rate of unemployment was slightly lower than in September.
Figures 3.A and 3.B show the distributions of participants' projections for real GDP growth and the unemployment rate from 2018 to 2021 and in the longer run. The distributions of individual projections for real GDP growth for 2019 and 2020 shifted down relative to those in the September SEP, while the distributions for 2021 and for the longer-run rate of GDP growth were little changed. The distribution of individual projections for the unemployment rate in 2019 was a touch more dispersed relative to the distribution of the September projections; the distribution moved slightly higher for 2020, while the distribution for the longer-run normal rate shifted toward the lower end of its range.
The Outlook for Inflation
The median of projections for total PCE price inflation was 1.9 percent in 2019, a bit lower than in the September SEP, while the medians for 2020 and 2021 were 2.1 percent, the same as in the previous projections. The medians of projections for core PCE price inflation over the 2019-21 period were 2.0 percent, a touch lower than in September. Some participants pointed to softer incoming data or recent declines in oil prices as reasons for shaving their projections for inflation.
Figures 3.C and 3.D provide information on the distributions of participants' views about the outlook for inflation. On the whole, the distributions of projections for total PCE price inflation and core PCE price inflation beyond this year either shifted slightly to the left or were unchanged relative to the September SEP. Most participants revised down slightly their projections of total PCE price inflation for 2019. All participants expected that total PCE price inflation would be in a range from 2.0 to 2.3 percent in 2020 and 2021. Most participants projected that core PCE inflation would run at 2.0 to 2.1 percent throughout the projection horizon.
Appropriate Monetary Policy
Figure 3.E shows distributions 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 2021 and over the longer run. The distributions for 2019 through 2021 were less dispersed and shifted slightly toward lower values. Compared with the projections prepared for the September SEP, the median federal funds rate was 25 basis points lower over the 2019-21 period. For the end of 2019, the median of federal funds rate projections was 2.88 percent, consistent with two 25 basis point rate increases over the course of 2019. Thereafter, the medians of the projections were 3.13 percent at the end of 2020 and 2021. Most participants expected that the federal funds rate at the end of 2020 and 2021 would be modestly higher than their estimate of its level over the longer run; however, many marked down the extent to which it would exceed their estimate of the longer-run level relative to their September projections. The median of the longer-run projections of the federal funds rate was 2.75 percent, 25 basis points lower than in September.
In discussing their projections, many participants continued to express the view that any further increases in the federal funds rate over the next few years would likely be gradual. That anticipated pace reflected a few factors, such as a short-term neutral real interest rate that is currently low and an inflation rate that has been rising only gradually to the Committee's 2 percent objective. Some participants cited a weaker near-term trajectory for economic growth or a muted response of inflation to tight labor market conditions as factors contributing to the downward revisions in their assessments of the appropriate path for the policy rate.
Uncertainty and Risks
In assessing the appropriate path of the federal funds rate, 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 figures 4.A, 4.B, and 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||±0.8||±1.6||±2.1||±2.1|
|Unemployment rate 1||±0.1||±0.8||±1.5||±1.9|
|Total consumer prices 2||±0.2||±1.0||±1.0||±1.0|
|Short-term interest rates3||±0.1||±1.4||±2.0||±2.4|
Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1998 through 2017 that were released in the winter 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 Historical Forecasting Errors: The Federal Reserve's Approach," Finance and Economics Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), https://dx.doi.org/10.17016/FEDS.2017.020.
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. Participants generally continued to view the degree of uncertainty attached to their economic projections for real GDP growth and inflation as broadly similar to the average of the past 20 years.21 A couple more participants than in September viewed the uncertainty around the unemployment rate as higher than average.
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 generally judged the risks to the outlook for real GDP growth, the unemployment rate, headline inflation, and core inflation as broadly balanced--in other words, as broadly consistent with a symmetric fan chart. Two more participants than in September saw the risks to real GDP growth as weighted to the downside, and one less judged the risks as weighted to the upside. The balance of risks to the projection for the unemployment rate was unchanged, with three participants judging the risks to the unemployment rate as weighted to the downside and two participants viewing the risks as weighted to the upside. In addition, the balance of risks to the inflation projections shifted down slightly relative to September, as one less participant judged the risks to both total and core inflation as weighted to the upside and one more participant viewed the risks as weighted to the downside.
In discussing the uncertainty and risks surrounding their economic projections, participants mentioned trade tensions as well as financial and foreign economic developments as sources of uncertainty or downside risk to the growth outlook. For the inflation outlook, the effects of trade restrictions were cited as upside risks and lower energy prices and the stronger dollar as downside risks. Those who commented on U.S. fiscal policy viewed it as an additional source of uncertainty and noted that it might present two-sided risks to the outlook, as its effects could be waning faster than expected or turn out to be more stimulative than anticipated.
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 along with other factors. 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, the 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 2.2 to 3.8 percent in the current year, 1.4 to 4.6 percent in the second year, and 0.9 to 5.1 percent in the third and fourth years. The corresponding 70 percent confidence intervals for overall inflation would be 1.8 to 2.2 percent in the current year and 1.0 to 3.0 percent in the second, third, and fourth 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.
19. Five members of the Board of Governors, one more than in September 2018, were in office at the time of the December 2018 meeting and submitted economic projections. Return to text
20. One participant did not submit longer-run projections for real GDP growth, the unemployment rate, or the federal funds rate. Return to text
21. 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