Magazine article Economic Trends

Economic Projections from the January FOMC Meeting

Magazine article Economic Trends

Economic Projections from the January FOMC Meeting

Article excerpt

02.18.09

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The economic projections of the FOMC (Federal Open Market Committee) are released in conjunction with the meeting minutes four times a year (January, April, June, and October). The projections are made by the participants of the FOMC meeting and are based on all pertinent information available at the time, each participant's assumptions about the economic factors affecting the outlook, and each participant's view of appropriate monetary policy. "Appropriate monetary policy," according to the press release for the January 2009 meeting, "is defined as the future policy that, based on current information, is deemed most likely to foster outcomes for economic activity and inflation that best satisfy the participant's interpretation of the Federal Reserve's dual objectives of maximum employment and price stability."

Economic conditions between the release of the October and January projections have deteriorated considerably. The credit crisis intensified, the employment situation darkened, the NBER announced that we are indeed officially in a recession, and virtually every indicator of economic health worsened. At its October 2008 meeting, the FOMC cut the federal funds rate target by 50 basis points, lowering it to 1.5 percent. By December, the Committee had slashed the target rate to a range of 0.0 percent to 0.25 percent and embarked on an aggressive and unprecedented path of monetary policy called "credit-easing."

The weaker near-term outlook is reflected in the FOMC's projections for economic growth in 2009. The Committee's central tendency is now for the economy to contract in 2009 between -0.5 percent and -1.3 percent, compared to October's central tendency of -0.2 percent to 1.1 percent. Even more striking is the fact that the most optimistic projection (the top end of the range) in 2009 is for real GDP to eke out a 0.2 percent gain.

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The central view is for aggregate output to decline throughout the first half of the year, likely driven by further declines in consumer spending, as individuals struggle with labor market weakness, tight credit markets, and deteriorating asset prices. Meeting participants also anticipated some form of fiscal stimulus as well as other measures that would help support a return to normally functioning credit markets. At the time the projections were generated, however, the details of such measures were not complete. Now that they are known, further revisions may result, but these will be reflected in the next forecast period. Furthermore, most of the participants regarded the uncertainty around this forecast to be greater than historical norms and judged the risks to growth to be weighted to the downside.

Nonfarm payrolls have been slashed by roughly 1.8 million in the past three months (November, December, and January), and the Committee now expects labor market weakness to continue throughout 2009. Reflecting the speed at which the employment situation has deteriorated, the low end of the range in January's projections for unemployment rose to 8.0 percent from October's projections, equal to the Committee's most pessimistic forecast in October. Most participants now expect that the unemployment rate will rise to between 8.5 percent and 8. …

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