The Fed's Economic Outlook

With the markets building in expectations of soft US economic growth with little inflation, it could be worthwhile to examine the Fed's outlook in the April FOMC Minutes.  Although the Fed's forecasts are not particularly reliable, they are useful in evaluating whether the data flow are truly moving in a direction signaling a policy change.  From this perspective, it would seem that the recent bout of soft economic data and low inflation are not enough to prompt a Fed easing.   Continuing below-trend growth and low inflation will probably be needed to get the Fed to move.

Fed Staff Outlook

The Fed staff acknowledges a near-term slowdown in GDP Growth, but expects a speedup soon thereafter.   Thus, current signs of weakness should not change monetary policy.  Further weakness is presumably needed to convince the Fed that its economic forecast is too optimistic.  The staff expects somewhat higher inflation near term, as well, as temporary factors that held it down wear off.  But, the longer-term expectation is for inflation to remain below 2.0%.  So, higher inflation prints can be ignored if they can be attributed to a reversal of one-off component swings.  But, continuing low inflation, which is possible given the strong dollar and recent drop in oil prices, is conceivable and could get the Fed to reevaluate its inflation forecast.

The Minutes say:

Real GDP Growth
The projection for U.S. economic activity prepared by the staff for the April–May FOMC meeting was revised up on net. Real GDP growth was forecast to slow in the near term from its solid first-quarter pace, as sizable contributions from inventory investment and net exports were not expected to persist. The projection for real
GDP growth over the medium term was revised up, primarily reflecting a lower assumed path for interest rates, a slightly higher trajectory for equity prices, and somewhat less appreciation of the broad real dollar. 

Real GDP was forecast to expand at a rate above the staff’s estimate of potential output growth in 2019 and 2020 and then slow to a pace below potential output growth in 2021. The unemployment rate was projected to decline a little further below the staff’s estimate of its longer-run natural rate and to bottom out in late 2020.

Inflation 
The staff’s forecast for inflation was revised down slightly, reflecting some recent softer-than-expected readings on consumer price inflation that were not expected to persist along with the staff’s assessment that the level to which inflation would tend to move in the absence of resource slack or supply shocks was a bit lower in the medium term than previously assumed. 

As a result, core PCE price inflation was expected to move up in the near term but nevertheless to run just below 2 percent over the medium term. Total PCE price infla-tion was forecast to run a bit below core inflation in 2020 and 2021, reflecting projected declines in energy prices. 

FOMC Members Views

The FOMC members -- board members and Fed Bank Presidents -- have a similar outlook to the staff.  They saw the risk of a near-term slowdown, but acknowledge that 2019 Real GDP Growth may come in above their forecasts.   The latter suggests the Fed's Central Tendency for Real GDP Growth will be revised up at the June FOMC Meeting.

The minutes say:
 
Participants continued to view sustained expansion of economic activity, with strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. 

Participants noted the unexpected strength in first-quarter GDP growth, but some observed that the composition of growth, with large contributions from inventories and net exports and more modest contributions from consumption and investment, suggested that GDP growth in the near term would likely moderate from its strong pace of last year. 

For this year as a whole, a number of participants mentioned that they had marked up their projections for real GDP growth, reflecting, in part, the strong first-quarter reading.