As expected, Federal Reserve policymakers left short-term interest rates unchanged, did not alter the forward guidance on the federal funds target rate, and trimmed the monthly pace of asset purchases by another $10 billion (to $35 billion beginning in July). In its policy statement, the FOMC was a bit more optimistic about a pickup in growth. Fed officials’ forecasts of 2014 GDP growth were revised lower, but implicitly, forecasts for the final three quarters of 2014 remained strong. The range of expectations for GDP growth in 2015 and 2016 were the same as those made in March. In her press conference, Fed Chair Janet Yellen remained optimistic, but noted uncertainties. She also downplayed the risk of higher inflation.
At every other FOMC meeting, the Fed governors and 12 district bank presidents submit forecasts of GDP growth, unemployment, and inflation. The three highest and three lowest of these forecasts are thrown out to arrive at what are called “central tendency” ranges.
The central tendency range for 2014 GDP growth (4Q/4Q) was revised to 2.1-2.3% (vs. March’s range of 2.8-3.0%). That was entirely due to the reported decline in 1Q14 GDP growth (which may be revised even lower this week). Implicitly, the new range corresponds to a 3.1-3.4% average pace of GDP growth for the final three quarters of 2014. Moreover, the central tendency ranges for GDP growth in 2015 and 2016 were exactly the same as in March (3.0-3.2% and 2.5-3.0%, respectively).
In her press conference, Yellen said that, while there is uncertainty, “there are many good reasons why we should see a period of sustained growth in excess of the economy’s potential,” citing “a highly accommodative monetary policy, diminishing fiscal drag, easing credit conditions,” as well as more manageable household debt levels, rising home prices, and higher equity prices. Asked about the impact of developments outside the U.S., Yellen noted that there were geopolitical risks, which could have an impact on energy supplies and prices – but she expressed optimism that growth in emerging economies will be moderate and then pick up.
Asked about whether the Fed was “behind the curve” on inflation, Yellen said that “the CPI has been a bit on the high side, but the data that we’re seeing is noisy,” adding that “broadly speaking, inflation is evolving in line with the committee’s expectations.” These comments helped to ease the concerns of some market participants that recent higher inflation figures would lead the Fed to begin raising short-term interest rates sooner rather than later. Bond yields dipped.
Economic growth has disappointed in the last few years and Fed officials have generally revised their GDP forecasts lower over time. Some economists fear secular stagnation – a slower trend rate of growth in GDP (due in part to demographic factors). Yellen indicated that part of the reason we’re seeing disappointing growth and slower growth of potential output is the weak pace of capital investment. “As the economy picks up,” said Yellen, “I certainly would hope to see that contribution restored.” She also noted that elevated levels of long-term unemployment have also limited the economy’s potential, and noted that “my hope is that, as the economy recovers, we will see some repair,”drawing discouraged workers and many others at the margins back into the labor force.
A video and transcript of Yellen’s press conference is available on the Fed’s website. Yellen displays confidence. That’s part of the job. However, she used the word “uncertainty” nine times and the word “hope” three times, which suggests that the Fed may not be all that confident about the economic outlook. The first quarter was a weather story; the second quarter will be a rebound story. Monetary policy in 2015 will depend on what happens in the second half of 2014.
