The Fed’s Economic Projections: Lower GDP Growth, Lower Unemployment, Higher PCE Inflation

Along with its latest press release (more info on the $10 billion reduction in tapering), the Federal Reserve System released today its “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2014.” In this document, the institution provided an estimate for the change in real GDP for 2014* of 2.1% to 2.3%, down from the 2.8% to 3.0% March projections**. Over the longer run, expectations were also lowered -modestly, from 2.2% to 2.3%, to 2.1% to 2.3%.

“The longer-run projections (…) are the rates of growth, unemployment, and inflation to which a policymaker expects the economy to converge over time—maybe in five or six years—in the absence of further shocks and under appropriate monetary policy. Because appropriate monetary policy, by definition, is aimed at achieving the Federal Reserve’s dual mandate of maximum employment and price stability in the longer run, policymakers’ longer-run projections for economic growth and unemployment may be interpreted, respectively, as estimates of the economy’s normal or trend rate of growth and its normal unemployment rate over the longer run” (Federal Reserve).

On the other hand, projections for the unemployment rate (average civilian unemployment rate in the fourth quarter) ameliorated: unemployment is now expected in the 6.0% to 6.1% range for 2014, down from 6.1% to 6.3% in the March projection. By the end of 2016, the Fed expects unemployment rates to be around 5.1%-5.5%.

Source: Federal Reserve

The issue that really concerns most employed Americans is, however, inflation, and the Fed did not deliver great news in this area. PCE inflation (measured as the percentage rates of change in the price index for personal consumption expenditures) is expected in the 1.5% to 1.7% range for 2014, up from 1.5% to 1.6% expected back in March. For the long run, PCE inflation is projected at 2.0%.

Source: Federal Reserve

* “as measured from the  fourth quarter of the previous year to the fourth quarter of the year indicated, with values plotted at the end of each year” (Federal Reserve).

** “The March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 18–19, 2014” (Federal Reserve).