Fed Rate Hikes: Sooner, But Smaller

Economic Pulse
June 18, 2014
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Today’s policy announcement from the Federal Open Market Committee (FOMC) was largely similar to its April statement. As expected, monthly asset purchases were trimmed by a further $10 billion to $35 billion.

The surprises, however, lay in the Fed’s forecasts. While 2014 GDP estimates were trimmed fairly dramatically from 2.8%-3.0% to 2.1%-2.3%, the reduction is broadly consistent with the downward revisions released over the last week from both the IMF and World Bank, reflecting a slower recovery from Q1’s weather-induced slowdown. Perhaps more striking, however, were the changes to the average and median forecasts for Fed Funds in 2015 and 2016. The median projections for the Fed Funds target in 2015 and 2016 are now 13 bps and 25 bps higher, respectively, than in the March forecast, even as the longer-run forecast for “neutral” policy is 25 bps lower, despite longer-run growth and unemployment forecasts that are broadly unchanged.

Some of the forecast changes may reflect the new composition of the FOMC; two of the prior nine voters were replaced with three new voters, including new Governors Brainard and Fischer. Nonetheless, markets largely ignored the changes, with bond yields falling slightly (10-year yields fell 4 bps to 2.59%) and equity market indices rising 0.6%-0.8%.

Chart 1. Economic Projections of Federal Reserve Board Members and Presidents, June 2014 and Prior

(Click or tap images to enlarge)

Note: Excludes the three highest and three lowest projections for each variable in each year (except average and median Fed Funds rate figures, which include all participants.)
Bolded figures are June 2014 forecasts (versus March 2014 and December 2013 projections).
Arrows (, and ≈ ) indicate direction of change in forecast from March 2014 to June 2014.
Real GDP and inflation projections are from Q4 of the previous year to Q4 of the year indicated. PCE inflation refers to the price index for personal consumption expenditures. Projections for the unemployment rate are for the average rate during Q4 of the year indicated.