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SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, June 2012 Percent 2012 Change in real GDP . . . . . 1.9 to 2.4 April projection . . . . . . 2.4 to 2.9 Central tendency1 2013 2014 2.2 to 2.8 3.0 to 3.5 2.7 to 3.1 3.1 to 3.6 Unemployment rate . . . . . . 8.0 to 8.2 April projection . . . . . . 7.8 to 8.0 7.5 to 8.0 7.3 to 7.7 PCE inflation . . . . . . . . . . . . 1.2 to 1.7 April projection . . . . . . 1.9 to 2.0 Core PCE inflation3 . . . . . 1.7 to 2.0 April projection . . . . . . 1.8 to 2.0 Variable Longer run 2.3 to 2.5 2.3 to 2.6 2012 1.6 to 2.5 2.1 to 3.0 Range2 2013 2014 2.2 to 3.5 2.8 to 4.0 2.4 to 3.8 2.9 to 4.3 7.0 to 7.7 6.7 to 7.4 5.2 to 6.0 5.2 to 6.0 7.8 to 8.4 7.8 to 8.2 7.0 to 8.1 7.0 to 8.1 6.3 to 7.7 6.3 to 7.7 4.9 to 6.3 4.9 to 6.0 1.5 to 2.0 1.6 to 2.0 1.5 to 2.0 1.7 to 2.0 2.0 2.0 1.2 to 2.0 1.8 to 2.3 1.5 to 2.1 1.5 to 2.1 1.5 to 2.2 1.5 to 2.2 2.0 2.0 1.6 to 2.0 1.7 to 2.0 1.6 to 2.0 1.8 to 2.0 1.7 to 2.0 1.7 to 2.0 1.4 to 2.1 1.6 to 2.1 1.5 to 2.2 1.7 to 2.2 Longer run 2.2 to 3.0 2.2 to 3.0 Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The April projections were made in conjunction with the meeting of the Federal Open Market Committee on April 24–25, 2012. 1. The central tendency excludes the three highest and three lowest projections for each variable in each year. 2. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year. 3. Longer-run projections for core PCE inflation are not collected. Authorized for Public Release – Page 1 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Table 1.A. Economic projections for the first half of 2012* (in percent) Central tendencies and ranges Central tendency Range 1.8 to 2.1 1.5 to 1.6 1.9 to 2.0 1.8 to 2.2 1.4 to 2.0 1.9 to 2.0 Change in real GDP PCE inflation Core PCE inflation Participants’ projections Projection Change in real GDP PCE inflation Core PCE inflation 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2.1 2.0 1.9 1.8 1.8 1.8 1.9 2.0 1.8 2.2 1.8 2.0 1.8 1.9 1.9 1.8 2.1 1.8 2.1 1.5 1.5 1.6 1.5 1.5 1.5 1.5 1.8 1.6 2.0 1.5 1.4 1.5 1.5 1.4 1.5 1.6 1.5 1.6 1.9 2.0 2.0 1.9 1.9 1.9 2.0 1.9 1.9 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 * Growth and inflation are reported at annualized rates. Authorized for Public Release – Page 2 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Table 1.B. Economic projections for the second half of 2012* (in percent) Central tendencies and ranges Central tendency Range 2.0 to 2.7 0.9 to 1.8 1.5 to 2.0 1.4 to 2.9 0.9 to 2.2 1.5 to 2.1 Change in real GDP PCE inflation Core PCE inflation Participants’ projections Projection Change in real GDP PCE inflation Core PCE inflation 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 1.9 2.0 2.3 2.2 2.2 1.6 2.5 2.8 2.2 2.8 2.0 2.0 2.0 2.1 2.9 1.4 2.7 2.0 2.3 1.3 1.7 1.2 1.1 0.9 1.1 0.9 2.2 1.2 2.0 0.9 1.4 0.9 1.1 1.6 0.9 1.8 0.9 1.8 1.5 1.6 1.6 1.9 1.5 1.5 2.0 2.1 1.9 2.0 1.7 1.7 1.5 1.7 1.7 1.5 2.1 1.5 1.9 * Projections for the second half of 2012 implied by participants’ June projections for the first half of 2012 and for 2012 as a whole. Growth and inflation are reported at annualized rates. Authorized for Public Release – Page 3 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Table 2. June economic projections, 2012–14 and over the longer run (in percent) Projection Year Change in real GDP Unemployment PCE rate inflation 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2.0 2.0 2.1 2.0 2.0 1.7 2.2 2.4 2.0 2.5 1.9 2.0 1.9 2.0 2.4 1.6 2.4 1.9 2.2 8.2 8.1 8.0 8.1 8.2 8.3 7.9 7.9 8.0 7.8 8.2 8.2 8.2 8.1 8.2 8.4 8.0 8.2 8.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2.3 2.8 2.6 2.7 2.2 2.2 2.5 3.5 2.7 3.0 2.2 2.2 2.5 2.3 2.8 2.5 2.7 2.6 3.0 8.1 7.6 7.5 7.7 8.0 8.0 7.5 7.0 7.8 7.0 8.0 8.0 7.8 7.9 7.6 8.1 7.6 7.8 7.5 Core PCE inflation Federal funds rate 1.4 1.6 1.4 1.3 1.2 1.3 1.2 2.0 1.4 2.0 1.2 1.4 1.2 1.3 1.5 1.2 1.7 1.2 1.7 1.7 1.8 1.8 1.9 1.7 1.7 2.0 2.0 1.9 2.0 1.8 1.8 1.7 1.8 1.8 1.7 2.0 1.7 1.9 0.13 0.13 0.13 0.13 0.13 0.13 0.75 0.13 0.13 0.50 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.50 1.6 1.8 1.9 2.0 1.5 1.5 2.1 2.0 2.0 2.0 1.5 1.7 1.8 1.7 1.8 1.5 2.0 1.5 2.0 1.7 1.8 1.8 2.1 1.6 1.4 2.1 2.0 2.0 2.0 1.7 1.7 1.8 1.7 1.7 1.5 2.0 1.6 2.0 0.13 1.00 0.13 0.13 0.13 0.13 1.25 0.75 0.50 1.75 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 1.25 Authorized for Public Release – Page 4 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Table 2. (continued) Projection Year Change in real GDP Unemployment PCE rate inflation 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 3.5 3.4 4.0 3.5 3.1 3.3 3.0 3.0 3.4 3.0 3.1 2.8 3.2 3.0 2.8 3.6 3.3 3.4 3.2 7.5 7.0 6.7 7.2 7.7 7.7 7.0 6.5 7.4 6.3 7.7 7.7 7.5 7.4 7.3 7.6 7.0 7.4 7.0 1.8 1.9 2.0 2.0 1.5 1.5 2.2 2.0 2.0 2.0 1.5 1.8 2.0 1.7 1.8 1.7 2.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 LR LR LR LR LR LR LR LR LR LR LR LR LR LR LR LR LR LR LR 2.5 2.3 2.3 2.5 3.0 2.2 2.5 2.3 2.5 2.5 2.3 2.3 2.5 2.2 2.6 2.5 2.5 2.5 2.7 5.2 5.5 4.9 5.3 5.4 5.5 6.3 6.0 6.0 6.0 6.0 5.5 5.2 5.5 6.0 5.2 5.2 5.8 5.5 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Core PCE inflation Federal funds rate 1.8 1.9 2.0 2.1 1.6 1.5 2.2 2.0 2.0 2.0 1.7 1.8 2.0 1.7 1.7 1.5 2.0 1.6 2.0 0.13 2.50 0.50 0.13 0.13 0.13 1.75 2.75 1.50 3.00 0.50 0.13 0.75 0.50 0.50 0.13 1.75 1.50 2.00 Authorized for Public Release – Page 5 of 46 4.50 4.30 3.50 3.00 3.80 4.00 4.00 4.25 4.50 4.50 4.50 4.30 4.00 4.20 4.00 4.00 4.50 4.25 4.00 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Table 2 Appendix. Assessments of participants who, under appropriate monetary policy, judge that the federal funds rate will not be raised until after 2014 Projection Year of first increase Change in real GDP 1 4 5 6 12 16 2015 2015 2015 2015 2015 2015 4.0 3.8 4.0 3.4 3.2 4.0 Unemployment rate 6.8 6.4 7.0 7.2 7.2 6.9 PCE inflation Core PCE inflation Federal funds rate 1.9 2.1 1.7 1.8 2.0 1.9 1.9 2.2 1.7 1.8 2.0 1.6 0.75 0.50 1.50 0.50 1.00 1.00 Authorized for Public Release – Page 6 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 1.A. Central tendencies and ranges of economic projections, 2012–14 and over the longer run Percent Change in real GDP 5 Central tendency of projections Range of projections 4 3 2 1 + 0 1 Actual 2 3 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent Unemployment rate 10 9 8 7 6 5 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent PCE inflation 3 2 1 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent Core PCE inflation 3 2 1 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Note: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual. Authorized for Public Release – Page 7 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 1.B. Central tendencies and ranges of economic projections, 2012–14 and over the longer run Percent Change in real GDP 5 Central tendency of projections Range of projections 4 3 2 1 + 0 1 Actual 2 3 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent Unemployment rate 10 9 8 7 6 5 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Percent PCE inflation 5 4 3 2 1 + 0 - 2007 2008 2009 2010 2011 2012 2013 2014 Longer run Note: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual. Authorized for Public Release – Page 8 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy, June 2012 Number of participants Appropriate timing of policy firming 9 8 7 7 6 6 5 4 3 3 3 2 1 2012 2013 2014 2015 Appropriate pace of policy firming Percent Target federal funds rate at year-end 6 5 4 3 2 1 0 2012 2013 2014 Longer run Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target federal funds rate from its current range of 0 to 1/4 percent will occur in the specified calendar year. In April 2012, the numbers of FOMC participants who judged that the first increase in the target federal funds rate would occur in 2012, 2013, 2014, and 2015 were, respectively, 3, 3, 7, and 4. In the lower panel, each shaded circle indicates the value (rounded to the nearest 1/4 percentage point) of an individual participant’s judgment of the appropriate level of the target federal funds rate at the end of the specified calendar year or over the longer run. Authorized for Public Release – Page 9 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 4.A. Uncertainty and risks – GDP growth 2(a): Please indicate your judgment of the uncertainty attached to your projections relative to levels of uncertainty over the past 20 years. Number of participants 20 June projections April projections 18 16 14 12 10 8 6 4 2 Lower (C) Broadly similar (B) Higher (A) 2(b): Please indicate your judgment of the risk weighting around your projections. Number of participants 20 June projections April projections 18 16 14 12 10 8 6 4 2 Weighted to downside (C) Broadly balanced (B) Weighted to upside (A) Individual responses Respondent 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2(a) 2(b) A C A C A C A C A C A C A B B B A C A B A C A C A C A C A C A C A C A C A B Authorized for Public Release – Page 10 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 4.B. Uncertainty and risks – Unemployment rate 2(a): Please indicate your judgment of the uncertainty attached to your projections relative to levels of uncertainty over the past 20 years. Number of participants 20 June projections April projections 18 16 14 12 10 8 6 4 2 Lower (C) Broadly similar (B) Higher (A) 2(b): Please indicate your judgment of the risk weighting around your projections. Number of participants 20 June projections April projections 18 16 14 12 10 8 6 4 2 Weighted to downside (C) Broadly balanced (B) Weighted to upside (A) Individual responses Respondent 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2(a) 2(b) A A A A A A A A A A A B A B B B A A A B A B A A A A A A A A A A A A A A A B Authorized for Public Release – Page 11 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 4.C. Uncertainty and risks – PCE inflation 2(a): Please indicate your judgment of the uncertainty attached to your projections relative to levels of uncertainty over the past 20 years. Number of participants 20 June projections April projections 18 16 14 12 10 8 6 4 2 Lower (C) Broadly similar (B) Higher (A) 2(b): Please indicate your judgment of the risk weighting around your projections. Number of participants 20 June projections April projections 18 16 14 12 10 8 6 4 2 Weighted to downside (C) Broadly balanced (B) Weighted to upside (A) Individual responses Respondent 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2(a) 2(b) B B A A A C A C B B A B A C B B C B A A B B A B B B B B A C A B A C B B B B Authorized for Public Release – Page 12 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 4.D. Uncertainty and risks – Core PCE inflation 2(a): Please indicate your judgment of the uncertainty attached to your projections relative to levels of uncertainty over the past 20 years. Number of participants 20 June projections April projections 18 16 14 12 10 8 6 4 2 Lower (C) Broadly similar (B) Higher (A) 2(b): Please indicate your judgment of the risk weighting around your projections. Number of participants 20 June projections April projections 18 16 14 12 10 8 6 4 2 Weighted to downside (C) Broadly balanced (B) Weighted to upside (A) Individual responses Respondent 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2(a) 2(b) B B A A A C A C B B A B A C B B C B A A B B B B B B C B A C A B A C B B B B Authorized for Public Release – Page 13 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Longer-run Projections 1(c). If you anticipate that the convergence process will take SHORTER OR LONGER than about fve or six years, please indicate below your best estimate of the duration of the convergence process. You may also include below any other explanatory comments that you think would be helpful. Respondent 1: The unemployment rate may not converge to its longer-run value until late in the 5-6 year window. Respondent 2: N/A Respondent 3: Our current estimate of the economy’s potential growth rate is in the 2% to 2 12 % range. By 2017-18 we anticipate potential growth of around 2 14 %. A reasonable estimate of the long-run unemployment rate is 4% to 6%. Assuming appropriate policy and no further signifcant shocks, we expect the unemployment rate to be in this range and the output gap to be around zero by 2017-18; analysis of recent long expansions (1980s and 1990s) suggests the unemployment rate could be somewhat below 5% in 5-6 years time. We assume that long-term infation expectations will continue to be anchored around 2.5% on a CPI basis and that the FOMC’s infation objective will remain at 2% for the PCE defator and around 2.5% for the CPI. Under these conditions and with the output gap anticipated to be near zero, we expect infation as measured by the PCE defator to be close to 2% in 2017-18. Respondent 4: The headwinds facing the economy have been exceptionally persistent in contrast to the normal cyclical dynamics characteristic of most U.S. recoveries. I expect these headwinds to persist, possibly intensifying if the problems facing the euro area result in sluggish global growth for a prolonged period and advanced countries, including the United States, take actions to place fscal policy on more sustainable paths. I therefore think that the economy is unlikely to converge to its longer run steady state until close to the end of the decade Respondent 5: N/A Respondent 6: N/A Respondent 7: N/A Respondent 8: I anticipate that the convergence process will be shorter than 5-6 years. In my view, real GDP growth and the unemployment rate will converge by year-end 2015, while PCE infation will converge even quicker. Respondent 9: N/A Respondent 10: The convergence process may be slightly shorter than 5-6 years Respondent 11: N/A Respondent 12: Unemployment should be close to its long-run value in fve to six years. Infation should be close to its long-run value by next year. Authorized for Public Release – Page 14 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Respondent 13: N/A Respondent 14: N/A Respondent 15: N/A Respondent 16: Convergence to the longer-run levels of the unemployment rate and infation is expected in 5 to 6 years. Respondent 17: N/A Respondent 18: N/A Respondent 19: Full convergence may take six years. However, risks are weighted toward faster convergence. Authorized for Public Release – Page 15 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Uncertainty and Risks 2(a). (Optional) If you have any explanatory comments regarding your judgment of the uncertainty attached to your projections relative to levels of uncertainty over the past 20 years, you may enter them below. Respondent 1: N/A Respondent 2: Several factors contribute to heightened uncertainty, including the European debt crisis, U.S. fscal policy (near-term and medium-term), slowing world growth, and ongoing changes in the regulatory environment. In addition, the Federal Reserve’s unconventional policies are a source of uncertainty because they have no historical precedent. Respondent 3: Quantitative judgment based on the standard deviation of the FRBNY forecast distribution for GDP growth and core PCE infation relative to the forecast errors over the last 20 years. Our assessment of the uncertainty for all of these projections has increased since the April SEP. Respondent 4: N/A Respondent 5: N/A Respondent 6: N/A Respondent 7: Volatility was unusually low in the past twenty years. Respondent 8: N/A Respondent 9: It is not clear that real output will grow more rapidly than the longer-term trend rate and thereby return to the pre-recession trend line, or whether we are instead now tracking a permanently lower trend line. Thus uncertainty regarding GDP growth and unemployment is elevated relative to the recent past. Infation expectations are probably more frmly anchored now than they were 10 to 20 years ago, and the FOMC’s consensus statement has probably enhanced that anchoring. As a result, uncertainty regarding infation is correspondingly lower than in the past. Respondent 10: The possibility that the European debt crisis is not resolved in an orderly fashion continues to be a risk to the forecast. There is uncertainty about domestic fscal policy as well. It remains the case that the e ect of the extraordinary monetary policy in place and uncertainties surrounding the future path of policy, including the timing of the exit from accommodative policy, contribute to uncertainty around my infation forecast. Respondent 11: N/A Respondent 12: Uncertainty about growth and unemployment is high because of our lack of experience with recoveries from fnancial crises/housing busts; the ongoing structural changes in productivity and the labor market; fscal policy; and, especially, global factors, including not only European developments but also China/EMEs and oil. Core infation remains quite stable, refecting stable infation expectations and monetary policy communication. Overall infation is more uncertain than historically because of the high volatility of commodity prices, which in turn is tied to the variability/uncertainty in the global economy as well as fnancial factors to some extent (e.g., volatile risk preferences). Authorized for Public Release – Page 16 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Respondent 13: N/A Respondent 14: Uncertainty about my projection for economic activity is elevated relative to its average over the past 20 years. My assessment includes the following factors: (i) The “new normal” for macroeconomic relationships going forward remains unclear. For example, there is greater uncertainty than usual about the level and growth rate of potential output. (ii) The crisis in Europe has intensifed since April, and the risks of more extreme downside scenarios there have risen. In these scenarios, fnancial market contagion to the United States could be severe. At the same time, other major economies in the world, such as China, are slowing. (iii) Domestically, a downside risk is a U.S. political stalemate that leads to abruptly contractionary fscal policy. (iv) In the event of adverse shocks, there is limited ability for monetary and fscal policy to dampen the e ects. This limited scope for countercyclical policy implies greater variance in outcomes. (v) Of course, there are upside risks to the outlook as well. For example, the housing market may be poised to improve faster than expected, which could potentially encourage a virtuous cycle of improving confdence, fundamentals, and fnancial conditions. In contrast, underlying infation is anchored by quite stable infation expectations. The stability of these expectations has been reinforced by the announcement of a 2 percent numerical objective for infation. Hence, uncertainty about core infation is lower than in the past two decades. Uncertainty about headline infation is broadly similar to the past two decades, refecting the lower uncertainty about underlying infation that is o set by greater-than-usual uncertainty about oil prices. Respondent 15: Compared to conditions at the time of the April meeting, the uncertainty surrounding forecasts of GDP growth and unemployment have risen, primarily refecting the crisis in Europe and the fscal problems facing the United States next year. Respondent 16: N/A Respondent 17: The possibility of cataclysmic e ects in Europe with unpredictable spillover e ects makes this period unusually fraught with uncertainty. Respondent 18: N/A Respondent 19: N/A Authorized for Public Release – Page 17 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Uncertainty and Risks (continued) 2(b). (Optional) If you have any explanatory comments regarding your judgment of the risk weighting around your projections, you may enter them below. Respondent 1: Our baseline forecast has been revised down since April to show greater restraint on the U.S. economy emanating from events in Europe and the fscal situation in the U.S. However, it is still diÿcult to see the risks from these events as balanced: the potential bad outcomes of the political debates both here and abroad would be associated with recessions, while the more successful resolutions likely would not provide a symmetric boost to growth relative to trend. This is especially true with regard to Europe, where any resolution requires a diÿcult period of structural readjustments and changes in terms of trade that would severely weigh on the Euro-area economies. Respondent 2: The risks to GDP growth are weighted to the downside, and the risks to unemployment are weighted to the upside. Downside risks to growth (and upside risks to unemployment) in the near term include the European debt crisis, a slowdown in emerging market growth, and the fscal cli in the United States. In the medium term, I see the risks to growth and unemployment as balanced as the resilience of the U.S. economy poses upside risks to growth (downside risks to unemployment) o set by downside risks to growth (upside risks to unemployment) from a possible spillover of near term risks into the medium term. The risks to infation are skewed to the upside due to the highly accommodative stance of monetary policy and longer term fscal imbalances. Respondent 3: Quantitative judgment based on the di erence between the central projection and the expected value from the FRBNY forecast distribution. The balance of risks to the infation outlook are roughly balanced over the near term, but skewed to the downside over the medium term. Respondent 4: N/A Respondent 5: N/A Respondent 6: N/A Respondent 7: My projection for infation is conditioned on my view that the output gap is less negative than in the Tealbook. My weighting of risks for infation refects the possibility that this view could prove to be wrong. Respondent 8: N/A Respondent 9: In the near term, there is an appreciable downside risk to growth in Europe that could lead to lower US exports to Europe and emerging economies. Moreover, the fscal cli poses a clear downside risk. In the medium term, impediments to growth may be serious and persistent enough to impede a the rise in GDP growth given above. Respondent 10: I view the risks to infation as weighted to the upside over the medium and longer run. Longer-term infation risks refect uncertainty about the timing and eÿcacy of the Fed’s withdrawal of accommodation. Over the near term, the risk to output growth is weighted to the downside and the risk to the unemployment rate is weighted to the upside, refecting uncertainty surrounding the ongoing crisis in Europe and domestic fscal policy. Over the medium term, as Authorized for Public Release – Page 18 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 these uncertainties abate, the risks shift to the upside for GDP growth and to the downside for the unemployment rate. Respondent 11: N/A Respondent 12: Downside risks to growth and upside risks to unemployment come from Europe and other global risks (China), fscal cli /debt limit, oil shocks. These outweigh the upside risks associated with a better than expected resolution of European or US fscal issues or greater momentum in the economy. Risks to infation are tied primarily to commodity prices, which are volatile but as likely to be declining (esp in a global growth slowdown) as rising. Respondent 13: N/A Respondent 14: Risks to growth are skewed to the downside and, consequently, to the upside for unemployment. Key downside risks to the outlook are the European sovereign debt crisis and the looming U.S. fscal cli . In addition, negative shocks could have particularly severe e ects, because of the continuing vulnerability of the fnancial system as well as the limited ability of fscal and monetary policy to respond to o set them. Infation risks, in contrast, are more typically balanced. Respondent 15: N/A Respondent 16: N/A Respondent 17: Downside risks stemming from the worsening global outlook continue to have a dominant infuence on my assessment of the risks to growth and unemployment. The potential for slack to play a greater role on near and medium-term infation trends argues in favor of shifting my assessment of the infation risks from broadly balanced, to weighted to the downside (that is, infation could fall to an undesirably lower rate.) Respondent 18: N/A Respondent 19: N/A Authorized for Public Release – Page 19 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Key Factors Informing Your Judgments regarding the Appropriate Path of the Federal Funds Rate 3(c). Please describe the key factors informing your judgments regarding the appropriate path of the federal funds rate. You may include other comments on appropriate monetary policy here as well. Respondent 1: My judgments regarding appropriate policy refect a loss function that equally weights deviations in infation and unemployment from their longer-run goals. Infation is projected to run slightly below target. In contrast, our miss on employment is massive–even the most conservative assumption currently would put it at 2 percentage points–and in light of the large downside risks to the projection, the chance for signifcant improvement is small. Accordingly, my appropriate policy would add more accommodation today. My preferred way of increasing accommodation would be to condition our future policy moves on explicit economic markers, namely, that we would delay the frst increase in the funds rate until the unemployment rate had at least reached 7 percent or the medium term infation forecast hit 3 percent. After lift-o , rates would initially increase broadly in line with Taylor (1999); these plans would also be communicated today. In addition to these communications, I would begin today a new LSAP program with the purchase of additional MBS, both to lower term premia (with an emphasis on those in mortgage markets) and to underscore our commitment to keep the federal funds rate low for a long time. Such a policy accepts the risk of infation running above 2 percent. However, the risk of even a moderate loss against our infation goal appears quite small. For example, even with the extra accommodation provided by the Tealbook optimal policy, infation only overshoots our goal by a couple of tenths over the (long-run) projection period–and the sum of these misses shies in comparison to the size and persistence of the di erences between the unemployment rate and the NAIRU under any of the Tealbook policy alternatives. Respondent 2: Key factors informing my judgment regarding the appropriate path of monetary policy are achieving an infation objective of 2 percent and ensuring a sustainable economic recovery that reduces unemployment. In order to preempt the potential for rising infationary pressures and the buildup of risks in the fnancial system that could impede the achievement of these goals, I currently anticipate it will be necessary to begin the process of normalizing monetary policy in 2013. After raising the federal funds rate to 1.0 percent, I would maintain it for a period of time to allow the economy and markets to adjust to a non-crisis rate environment. Respondent 3: The crucial factors behind our assessment of the appropriate path for monetary policy and the FFR are the current state of the economy, our central economic outlook, and our balance of risks around the central outlook. Indicators of economic and fnancial conditions generally have worsened somewhat since April, indicating that the expansion is tenuous at this time. Currently, we observe the combination of continuing substantial resource underutilization; a forecast of slow growth, high unemployment, and near- or below-objective infation; and downside risks to the real activity and infation outlooks as calling for continued policy accommodation. In an environment where the policy rate is constrained by the zero lower bound and the fnancial system remains impaired, such accommodation will lead to the target FFR remaining near zero until late 2014. We expect that long-term infation expectations will remain anchored over this period. The pace of renormalization of the target FFR following the period of near zero policy rates will depend upon our assessment of economic conditions and infation expectations as well as upon credit spreads and overall fnancial conditions. Authorized for Public Release – Page 20 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 An important factor informing our assessment of the appropriate path for the target FFR is our estimate of the equilibrium real short-term interest rate. In normal times, we assume that the this rate is in the range of 1% - 3%; adding the objective for infation (2%) then gives our estimated range for nominal equilibrium rate as 3.0 - 5.0%. Given the recent behavior of nominal and real Treasury yields and productivity growth, we currently see this rate over the longer-run as more likely to be in the lower half of the indicated range, which results in the point estimate given in the response to question 3(a). Moreover, given the weak state of the economy and our expectations of continued strained fnancial conditions, our assessment of the current “neutral” FFR is below our estimate of the longer-run FFR and is expected to remain so for some time. As discussed in our answer to question 3(e), our policy path is predicated on the FOMC continuing the Maturity Extension Program (MEP) through the end of this year to provide the accommodation that we see as necessary in the current situation. Further deterioration in economic and fnancial conditions, our modal forecast, and our risk assessment would lead us to assume a purchase program with communication indicating that purchases would continue until a self-sustaining recovery is fully established. Respondent 4: My assessment of economic conditions is close to Tealbook, but my preferred policy path is more accommodative than the outcome-based rule incorporated into the Tealbook baseline. My modal forecast assumes that the federal funds rate will be maintained in its present range until late 2015, when the unemployment rate has declined to around 6.5%. My preferred path is marginally less stimulative than the optimal control path with commitment but more stimulative than Taylor (1999). Given the persistent nature of the headwinds facing the economy and the atypical cyclical dynamics we have seen since the recovery began, I consider it appropriate to provide more stimulus than is called for under Taylor (1999). I estimate that under my policy path, unemployment will be about 0.7% lower in 2015 than if policy instead followed Taylor 1999 and infation will hold close to 2% over the forecast instead of running consistently under 2% under Taylor (1999). Although Taylor (1999) provides a useful policy benchmark, I believe it is not appropriate to follow its prescriptions in the current circumstances. Importantly the persistent nature of the aggregate demand shortfall– refected in the fact that like other forecasters, I have been consistently too optimistic about the pace of recovery over the last few years–suggests that the equilibrium real funds rate is depressed well below its average historical level. Indeed, the sta ’s three-factor yield curve model currently estimates that the expected nominal short rate ten years ahead stands at 3.07%–well below the sta ’s 4.25% assumed equilibrium nominal rate. Survey evidence suggests that longer-term infation expectations remain frmly anchored at 2 percent, and hence that sta estimate of the far-forward nominal short rate implies that the expected real short rate ten years ahead is only 1.0 percent.. Moreover, the one-year forward TIPS rate 10 years ahead is currently only 0.7 percent–far below its historical norm of 2.25 percent. In e ect, the highly persistent weakness of aggregate demand calls for a downward adjustment in the intercept of the Taylor (1999) rule. Another reason I consider it appropriate to hold the funds rate lower for longer in response to the constraints that the zero bound have long placed on monetary policy and to the asymmetric nature of the risks facing the economy. Such a strategy is similar to that proposed by Reifschneider and Williams. With respect to risks, if downside shocks materialize, the Committee has limited scope for response due to the zero lower bound whereas the scope to tighten policy is ample in the face of upside shocks. When combined with my assessment that the risks to economic activity are weighted to the downside, I see risk considerations as clearly favoring accommodation beyond that implicit in Taylor (1999). Respondent 5: My lift-o , which I believe should be no earlier than late 2015, is dependent on improved communication regarding the purpose of an extended period of a low federal funds rate; without such improved communication, I could anticipate the need to extend the time of frst lift o to no earlier than early 2016. Authorized for Public Release – Page 21 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Respondent 6: N/A Respondent 7: My January forecast for 2012 unemployment, 2013 unemployment, and 2014 unemployment is very close to being the same as my June forecast for those variables. My January forecast for 2012 PCE core infation, 2013 PCE core infation, and 2014 PCE core infation is very close to being to the same as my June forecast. This would argue in favor of my June policy forecast being the same as my January forecast. I’ve raised my fed funds rate targets by (a conservative) 25 basis points to refect my new higher estimate for the long-run NAIRU. Respondent 8: Assuming appropriate policy and my views on the convergence process, my judgment is that the federal funds rate should be increased in late (i.e., fourth quarter) 2013. Respondent 9: I believe that in order to achieve an infation rate of 2 percent we would want to begin raising the federal funds rate by late 2013. Respondent 10: Infation and infation expectations will be the main drivers of the removal of accommodation. Economic growth will be slightly above trend in the second half of 2012 and beyond; unemployment will decline slowly. The Committee will fnd it necessary to adjust policies to prevent infation from rising above its target. Respondent 11: N/A Respondent 12: I have pushed out takeo by two quarters or so refecting the slower progress on unemployment and infation remaining near target. I have extended the time near zero slightly to compensate partially for the time at the zero lower bound. I assume that the MEP is continued through end 2012. Respondent 13: I would begin raising rates as soon as it is clear that we are making material and sustainable progress on the employment side of our mandate, looking at participation, employment to population and other broader measures as well as the headline rate. The precise timing will depend on the rate of improvement as well as the absolute levels. Respondent 14: Large and persistent output and unemployment gaps coupled with infation that is moderately below our 2 percent objective call for continuing very accommodative monetary policy through most of 2014. Respondent 15: While unemployment is likely to remain elevated, I expect that it will be appropriate to begin raising the target for the federal funds rate in late 2014 to prevent infation from rising above levels consistent with price stability. By 2014, the economy will have recovered enough that preserving the stability of long-term infation expectations and, in turn, infation will warrant some tightening of monetary policy. This view of the appropriate path of policy refects the importance I place on keeping the underlying infation rate close to 2 percent, to preserve our credibility and to maintain price stability. Respondent 16: The frst increase in the federal funds rate is conditioned on an unemployment rate falling below 7 percent and underlying infation below 2.5 percent. In the modal outlook, infation remains well contained and the pace of economic growth picks up suÿciently to lower the unemployment rate below the 7 percent threshold only in 2015. This approach to setting the federal funds rate Authorized for Public Release – Page 22 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 is consistent with optimal policy calculations based on FRB/US that place equal weights on deviations of infation from a 2 percent target and the unemployment rate from the natural rate. Respondent 17: I expect the federal funds rate to remain in the 0 to 25 basis point range at least until such time that the rate of unemployment falls under 7 1/2 percent, accompanying an infation outlook that is projected to be around 2% over the medium term. Respondent 18: I begin by noting that under my assumptions for output, unemployment, and infation, and according to the SEP spreadsheet calculator, an outcome-based rule suggests funds-rate lift-o in 2014, with the funds rate reaching a level of approximately 0.5 at year-end 2014. From this point of departure, I have adjusted the year-end 2014 value upward by 100 basis points, to 1.50, to refect two factors. First, the outcome-based rule does not incorporate the further stimulative e ects of our asset purchases, so to the extent that these holdings are still in place, once lift-o occurs, it makes sense to adjust the funds rate upward, all else equal. Second, my estimate of the long-run steady-state NAIRU, at 5.8%, is a little on the high side, so as unemployment begins to decline toward that level it follows that one would want to tighten a touch more aggressively. Respondent 19: My policy projection is guided by the 1993 version of the Taylor Rule, with some smoothing and a temporary downward adjustment to the neutral real rate. As I think it desirable to begin raising short-term interest rates substantially earlier than is assumed in the Tealbook, I also think it desirable to begin shrinking the balance sheet earlier than is assumed in the Tealbook. I remain skeptical of the impact on real economic activity of purchases of Treasury securities and of changes to the maturity distribution of our Treasury portfolio. Authorized for Public Release – Page 23 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Appropriate Monetary Policy – Balance Sheet 3(d)&(e). Does your view of the appropriate path of the Federal Reserve’s balance sheet di er materially from that assumed by the sta in the Tealbook? If yes, please specify in what ways (either qualitatively, or if you prefer, quantitatively). June survey April survey YES NO 14 11 5 6 Respondent 1: Yes Under my appropriate policy assumptions, we purchase $500 billion of MBS over the next six months. Furthermore, I anticipate that the lift-o in the funds rate will occur the second half of 2015. Accordingly, actions to normalize the balance sheet would be delayed relative to the Tealbook. Respondent 2: No Because my view of appropriate monetary policy includes an earlier lift-o from zero for the federal funds rate, I would also start the normalization process for the balance sheet earlier than in the Tealbook, in line with the exit strategy principles agreed upon by the FOMC in June 2011. Respondent 3: Yes With the Tealbook assumption of lift-o of the target FFR having moved to within one quarter of our assumption, the di erences in the timing of the renormalization of the balance sheet (based on the June 2011 exit strategy principles) are little di erent. However, because of the deterioration in our central outlook and greater downside risks, we believe that some additional accommodation should be provided through a further extension of the duration of the Federal Reserve’s balance sheet. To provide that accommodation, we assume that the MEP is continued through the end of the year. In addition, if there are indications of a further deterioration in the real outlook or a further increase in the downside risks, we believe that additional accommodation through a purchase program would be warranted. If such a program was instituted, the accompanying communications should indicate that purchases would continue until conditions point to substantial progress in meeting the maximum employment objective. Respondent 4: Yes To provide additional support to the recovery I assume that the FOMC continues the Maturity Extension Program through the end of the year. If I do not see evidence in the months ahead that the economy is making satisfactory progress in lowering unemployment toward normal longer-run levels, I assume that further balance sheet actions will be implemented. Respondent 5: Yes The Tealbook assumes the termination of the Maturity Extension Program. My forecast assumes an extension of this program as providing further downward pressure on long term interest rates. Respondent 6: Yes I assume some additional moderate policy accommodation through extension of the MEP Authorized for Public Release – Page 24 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Respondent 7: Yes I believe that it be optimal to initiate exit more rapidly than is contemplated by the Tealbook. My optimal path of monetary policy, given my current forecast, involves stopping re-investment in early 2013 and initiating asset sales in mid-2014. Respondent 8: Yes According to the Committee’s exit strategy and my date of lift-o , I think the FOMC should begin reducing the SOMA portfolio earlier (e.g., early 2014) than in the Tealbook. The pace of the subsequent reduction likely exceeds that assumed in the Tealbook. Respondent 9: No I would initiate our balance sheet exit strategy sooner than is assumed in the Tealbook, in sync with my forecast of an earlier lift-o in the funds rate. Respondent 10: No My forecast does not incorporate any additional LSAPs or MEP. I anticipate following the Committee’s exit strategy principles, but because my funds rate path is steeper than in the Tealbook, I anticipate that we would reduce the size of the balance sheet more quickly than in the Tealbook over the forecast horizon. Respondent 11: Yes I believe that extending the MEP program as described in Alternative B is appropriate. Respondent 12: Yes I assume the MEP is extended for the remainder of 2012. Otherwise, as consistent as possible with Tealbook and broad exit principles. Respondent 13: Yes I assume that the MEP will be extended as proposed in Alternative B. Respondent 14: Yes I assume an extension of the maturity extension program (MEP) through the end of 2012. In addition, I assume that lifto of the funds rate will occur in the fourth quarter of 2014, which is a quarter later than Tealbook, and my balance sheet assumptions are adjusted accordingly. Respondent 15: No N/A Respondent 16: Yes The outlook is conditioned on a continuation of the maturity extension program through the end of this year, and on an additional round of securities purchases via a balance sheet expansion amounting to $500 billion. A reduction in the size of the Federal Reserve’s balance sheet starts to occur only at the time of the federal funds rate’s lift-o from the zero lower bound, which occurs in late 2015. Respondent 17: Yes I have assumed a continuation of the current maturity extension program through the end of the year. Authorized for Public Release – Page 25 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Respondent 18: Yes I am assuming that we will implement an extension of the Maturity Extension Program along the lines sketched in Alternative B of the proposed draft statements. Respondent 19: No N/A Authorized for Public Release – Page 26 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Forecast Narratives 4(a). Please describe the key factors shaping your central economic outlook and the uncertainty around that outlook. Respondent 1: Accommodative monetary policy, improved household and business balance sheets, and pent-up demands for capital goods and consumer durables should be boosting activity at rates above trend. However, even with relatively few fnancial spillovers, the events in Europe and the developing world portend weak demand from abroad. In addition, it is diÿcult to envision a base case scenario for the U.S. that does not include a step up in fscal restraint at the turn of this year. Furthermore, as evidenced by the recent slowdown in employment growth and softness in spending indicators, household and business sentiment remains extremely fragile, and bad news continues to induce new waves of caution that then impinge on spending. And for the foreseeable future, we can only expect a fow of such negative news shocks emanating from Europe and the fscal policy debates in the United States. Summing these factors, we are projecting that the economy will only grow close to 2 percent over the next year. Since this is essentially in line with the (medium-term) trend rate of growth, the unemployment rate is projected to remain near its current level over that period. As we move into the second half of 2013, we assume that the economy will begin to gain some of its long awaited cyclical momentum, and that activity will gradually accelerate, with growth reaching a 3-1/2 percent rate in 2014. Our infation forecast assumes that anchored infation expectations will largely o set the infuence of declining prices for energy and other commodities and the downward pressure on prices from resource gaps. On balance, we are projecting a small downtick in core infation over the next year. Owing to lower energy prices, overall infation will run several tenths below core. Respondent 2: I continue to expect a moderate economic recovery over the next several years with a gradual improvement in unemployment. Recovering demand, improving labor and housing markets, and accommodative monetary policy will support economic growth over the forecast horizon. However, fnancial headwinds, high household debt levels, and reductions in government spending will weigh on growth. Rising concerns about the European sovereign debt crisis in conjunction with indications of a slowdown in economic activity in Europe contributed to my downgraded outlook for growth. The considerable uncertainty surrounding U.S. fscal policy poses a large risk to the outlook. Turning to infation, I expect that a gradually improving economy and stable infation expectations will keep core infation near 2 percent over the forecast horizon. Over the medium term, a highly accommodative monetary policy and large long-run fscal imbalances pose upside risks to infation expectations and, hence, infation. In addition, the current extraordinary level of monetary policy accommodation raises the possibility of distortions in fnancial markets and the mispricing of risk that could eventually destabilize the economy. Respondent 3: Data released over the intermeeting period tended to be weaker than expected, leading to a downgrading of our assessment of the underlying strength of the US economy. The labor report for May was particularly disappointing. Also, new orders for nondefense capital goods plunged in March and then fell further in April. Changes in a fairly broad range of fnancial market indicators and commodity prices over the intermeeting period have been consistent with a loss of momentum. At this time we project that real GDP will grow at just a 2% annual rate in the second quarter, near the estimate for 2012Q1 and down from our mid-May projection of around 3%. Despite a sharp decline of energy prices that has provided a boost to real disposable income, it appears that real PCE growth in Q2 will be down slightly from the Q1 rate. Real residential investment is expected to expand in Q2 at a rate comparable to the Q1 increase. Growth of business investment spending likely will be Authorized for Public Release – Page 27 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 only modestly stronger than Q1’s relatively dismal gain. Real government spending is continuing to decline in Q2, and the net export growth contribution is expected to be zero. Regarding infation, the 12-month change in the overall PCE defator was 1.8% in April, down from 2.1% in March and the recent high of 2.9% in 2011Q3. Based on the May CPI data, we expect the 12 month change of the total PCE defator to slow to 1.5% in May, refecting the drop in energy prices. Further slowing is expected in the months ahead as year-over-year changes in energy prices turn deeply negative: given our energy price assumption, the 12-month change of the total PCE defator should be down to 1.3% in August and September. It also appears that core infation has peaked, with the 12 month change of the core PCE defator down to 1.9% in April from 2.0% in March. The May CPI data suggests a further slowing to 1.8% for May. In our forecast of December 2011, we anticipated growth to slow in 2012H1 to around 1 12 % to 2% (annual rate). However, the major driver of that forecast was our assumption that the payroll tax cut and emergency unemployment benefts would not be extended for 2012, thereby sharply depressing consumer spending over the frst half of the year (in this forecast we continue to assume a fscal drag in 2012 of 12 percentage point, then rising to a full percentage point in 2013, refecting assumptions similar to those in the Tealbook). Of course, those two provisions were extended for 2012, and the growth of real PCE and residential investment over 2012H1 appears to be above our December projections. Nonetheless, real GDP growth is likely to still average just 2% over 2012H1. Two components of fnal expenditures are primarily responsible for this relatively weak performance. The frst is inventory investment. In part this is due to the fact that consumer spending grew faster than we anticipated. Thus, this development should not be viewed as evidence of underlying weakness. More troubling and less well understood is the tepid growth of business fxed investment (BFI). It now looks like the GDP growth contribution from BFI in 2012H1 will be about half what we expected in December. Moreover, the higher frequency data do not point to a pick-up in H2. As mentioned above, new orders for nondefense capital goods are down and the Architectural Billings index fell back below 50 in April. Thus, we have extended the recent weakness of BFI growth over 2012H2. For 2012 we now project growth of real GDP of 2.1% (Q4/Q4), down from 2.7% in April. This is a relatively large change over a period of less than two months, although much of the decline is due to the fact that the April forecast was compiled when we anticipated growth in 2012Q1 of around 3% (annual rate) whereas it is now estimated at 1.9%. In addition to the downgrading of projected BFI growth, we have also tempered the growth of real PCE over H2, refecting the recent weakness of the employment data, the downward revisions of labor compensation for 2011Q4 and 2012Q1, and the decline of equity values. Export growth is now expected to be somewhat slower, refecting both the appreciation of the dollar and the downgrading of foreign growth. With growth in 2012H2 around our estimate of potential, we anticipate only a modest further reduction of the unemployment rate to 8.0% in 2012Q4. This projection is up from 7.8% in the April SEP even though we assume that the labor force participation rate will be 0.1 percentage point lower than in April (63.7% versus 63.8%). Given the steep decline of energy prices that has occurred in 2012, the total PCE defator is expected to rise 1 14 % - 1 12 % (Q4/Q4) as opposed to the 2.7% rise that occurred in 2011. The deterioration of conditioning assumptions over the intermeeting period also resulted in a markdown of projected growth of real GDP in 2013, although by a relatively modest 14 percentage point, to 2.6% (Q4/Q4) from 2.9% in April. This revision refects an expected continuation of the somewhat slower growth trajectory for BFI and a somewhat lower growth contribution from net exports due to lower foreign growth and a higher path for the dollar. With growth somewhat above potential, the unemployment rate is likely to fall about 12 percentage point to 7.5% by 2013Q4. With infation expectations well anchored and oil prices rising only very modestly, the four-quarter change of the total PCE defator rises to 1 34 % - 2% in 2013, just below the FOMC’s longer-run objective. We continue to assume in our central projection that by 2014 the headwinds slowing the economy will diminish and growth will pick up substantially above our estimate of potential growth. With Authorized for Public Release – Page 28 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 long-run infation expectations well-anchored, we also project infation to move towards the FOMC’s longer run objective by the end of 2014. Our risk and uncertainty assessments imply that our modal projection (conditional on an extension of the MEP) is both somewhat optimistic and unlikely to occur. The substantial decline in global longer-term interest rates–outside of countries caught up in the euro area crisis–was a major factor behind this dire assessment. In particular, the risks of a disorderly exit from the euro area and high levels of contagion have increased markedly over the inter-meeting period. Some of the uncertainty might be resolved by the elections in Greece on June 17 but until European policymakers can agree on a robust solution to the imbalances in the euro area downside risks are likely to predominate. Respondent 4: Incoming data during the intermeeting data has caused me to downgrade my assessment of the underlying momentum of aggregate demand. In response, I now assume that the FOMC will provide additional monetary policy accommodation by holding the funds rate at zero for about 2 quarters longer than I previously judged appropriate and by continuing the MEP rather than allowing it to end, as scheduled, in June. In my forecast, this additional accommodation works to o set the weaker underlying pace of spending so that the unemployment rate at the end of 2014 is only a few tenths higher than I forecast in April and infation, as in April, remains close to 2 percent. Abnormal seasonal factors complicate the interpretation of data pertaining to spending and the labor market. It appears that unseasonably warm weather pulled forward hiring into the frst quarter and may likewise have pulled forward spending. Data on both employment growth and consumer spending in the second quarter have weakened signifcantly, perhaps partly refecting payback. That said, a wide range of data suggests that the momentum of aggregate demand has genuinely weakened. With respect to the labor market, employment growth and GDP growth now appear to be in more normal alignment. In other words, the period of “catch up” in hiring appears to have ended. Absent further policy actions, I would envision growth near trend resulting in no meaningful progress in improving labor market conditions over the next few years. In addition, the global outlook has weakened significantly as the situation in Europe appears to be deteriorating. China also appears to be experiencing a signifcant slowdown. These factors are impinging on U.S. trade performance and are impacting fnancial conditions. Lower equity prices and a strong dollar will have a negative e ect on demand. Lower oil prices and the reduction in Treasury yields refecting safe haven fows serve as only very partial positive o sets. In addition, I see the risks to growth as asymmetric. The risks to fnancial stability from European developments have intensifed and the upcoming “fscal cli ” continues to pose a signifcant downside risk to activity. With respect to infation, upside risks to infation have diminished as energy prices have moved down considerably. With stable infation expectations and very modest growth in compensation, I expect infation to remain at or slightly below the FOMC’s 2% target, but should downside economic risks materialize, I would think that infation would fall below, possibly well below, our objective. Respondent 5: My outlook is shaped primarily by the uncertainties of how recent developments, primarily in Europe, comprehensively contribute to a loss of household and business confdence. The developments in Europe are most profound in this respect, but I continue to see downside risk from the anxiety in Europe contributing to the growing pessimism resulting from the modest growth in the US, the failure of the housing market to rebound more quickly, the anxiety surrounding the completion of a refnancing, the presidential election year, and the demoralizing e ects of long-term unemployment. Personal income is fat, which points to less support for household spending going forward. Private sector job gains in the past few months are slow and there is a noticeably softer trajectory of industrial production. Respondent 6: Far and away the most important factor shaping this forecast is the relative magnitude of the negative e ects of the Eurozone sovereign and bank problems. My forecast is premised Authorized for Public Release – Page 29 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 on the assumption that uncertainty and stress continue at high levels through the next two quarters, but that a full-blown systemic crisis does not develop in Europe. If this darker outcome does come to pass, my expectations for growth and unemployment would be substantially worse, and my expectations for infation moderately lower. Conversely, in the less likely but not impossible event that European oÿcials take suÿciently bold measures that there is a general relaxation of market tensions, I would expect a smaller drag on both trade fows and confdence levels, and thus modestly stronger numbers for growth and unemployment. The U.S. economy itself continues its pattern of a slow-moving recovery, though still slower than in April, While a variety of objective measures might suggest that a considerable part of the damage from the burst asset bubbles and recession have been worked o , and thus a period of higher-than-trend growth could be in the oÿng, the persistence of the European problems, along with uncertainty associated with the fscal cli , seem to have placed a fairly low ceiling on growth possibilities in the next few quarters. The slowing from what was already no more than a tepid pace, against the backdrop of the large external and political risks, makes a recession more than a small possibility Respondent 7: Growth will continue to be constrained by both demand and supply forces. On the demand side, household spending will continue to be constrained by the signifcant loss of wealth and net worth, as documented in the recent released summary of the 2010 SCF. On the supply side, there have been signifcant changes relative to four to fve years ago. Firms are fnding it harder to fnd appropriate workers. Entrepreneurs lack resources to initiate startups, which robs the economy of an important source of employment growth. The high level of corporate profts suggests that frms enjoy more market power, which reduces labor demand. Finally, of course, there is considerable uncertainty about future taxes and regulations. Both demand and supply push up - temporarily - on the unemployment rate. They operate in opposite directions on infation. Respondent 8: I continue to think that convergence to steady state is progressing. Nonetheless, the recent growth and infation data have caused some changes in my outlook. Respondent 9: Output and payroll growth have been softer than expected so far this year. Over time, additional frming in the labor market will be refected in gradually improving personal income and consumer spending. Business investment should continue to expand in the second half, although perhaps a pace below that of the last several years. Residential investment is growing at a moderate pace that is likely to continue. Federal defense spending has been unexpectedly soft, but oil prices have fallen more rapidly than expected. The expectation that the federal budget outlook requires signifcant adjustment, combined with signifcant uncertainty about the nature of the adjustments that will be adopted, is likely to dampen growth for the remainder of the year and beyond. Oil price declines have been unexpectedly steep, and could refect Gulf political strategies as much as any global growth slowdown. I expect oil prices to fatten out in a month or two. While falling energy prices are likely to defect core infation for a time, that’s likely to prove temporary, and I expect core infation to return close 2 percent by the end of the year. Respondent 10: Incoming data on economic activity have been somewhat weaker than I expected in my April forecast leading to a slightly downward revision to my near-term economic outlook. My view is that this weakness it is tied to uncertainties about Europe and domestic fscal policy and is temporarily leading to restrained business spending. I expect that spending will pick up and the economy will rebound as uncertainty surrounding the crisis in Europe and domestic fscal policy diminishes toward the end of this year. Authorized for Public Release – Page 30 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 I expect 3 percent growth over the medium term, slightly above my longer-term trend. With a moderate pace of growth over the forecast horizon, the labor market recovery remains gradual — I expect the unemployment rate to move down to about 6.3 percent by the end of the forecast horizon, at which time it remains above my estimate of the natural rate of unemployment. I anticipate that headline infation will be 2 percent in 2012 and remain at that level in 2013 and 2014. Infation stays anchored around my target of 2 percent in response to tighter monetary policy than that anticipated in the Tealbook. In my view, the substantial liquidity that is now in the fnancial system continues to imply a risk that infation will rapidly accelerate to unacceptable levels and that infation expectations may become unanchored. To ward o these developments, the FOMC will need to commence a steady tightening of monetary policy that begins some time toward the end of 2012.. Respondent 11: I used the TealBook baseline forecast. Respondent 12: The moderate strength earlier in the year appears to have been due in part to temporary factors, including inventory accumulation, the surge in auto sales, moderation in concerns about Europe, and the burst of job creation, as well as the weather. Recent slowing seems to be in part a return to the extended pattern of sluggish growth and hiring, together with worsening global fnancial and economic conditions, notably related to Europe. In part the pattern of sluggishness refects the absence of usual cyclical drivers, especially the lack of a robust housing recovery, as well as the weakness in consumption as households deal with the signifcant loss in wealth and income triggered by the crisis and recession as well as poor job prospects. Fiscal factors, including state and local, are an additional drag. Household and business confdence have improved but remain relatively low, and there is considerable uncertainty about the strength and durability of the recovery, conditions in Europe, and the US fscal outlook. Other than modest growth, factors that will put a small amount of downward pressure on unemployment include the end of EEB and the secular decline in participation. Core infation appears well anchored and the upward pressures on core from commodity prices are subsiding. Commodity prices are hard to forecast but appear likely to be stable to down. Wage infation and increases in unit labor costs are consistent with low infation. Respondent 13: I see signifcant slack in the economy. A substantial part of the declines in output and employment appear to me to be cyclical, and not yet structural. I also believe that our internal headwinds are gradually subsiding, and that the US. economy has the capacity to grow at a rate that would close the output gap within a reasonable period. Since the fnancial crisis, however, external shocks and headwinds have undermined the economy’s attempts to reach escape velocity. It seems likely that developments in Europe will restrain growth for the rest of this year, and for that reason I accept the 2012 sta baseline. For 2013 and 2014, I have assumed modestly stronger growth, faster employment growth and higher infation than the baseline, based on the hope/assumption that Europe will reach some kind of more stable equilibrium, albeit one that will mean years of austerity. If instead the current turmoil in Europe continues for a period of years, or worsens, the U.S. economy could face substantial ongoing drag that would make it diÿcult to meaningfully raise levels of employment. The same could be said of the other much discussed risks, particularly the fscal cli . Respondent 14: I expect the economic recovery will proceed at a moderate pace with real GDP growth only a touch above potential. Hence, I expect output and unemployment gaps to close very gradually. Some headwinds are slowly easing, including those related to banking and credit conditions. Housing prices look to have stabilized, which helps support a recovery in home construction. At the same time, other headwinds are intensifying. For example, the European crisis continues to weigh on equity prices and risk spreads, the global economy appears weaker, and U.S. fscal policy at all levels Authorized for Public Release – Page 31 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 is turning increasingly contractionary. Continuing monetary stimulus should support a moderate expansion over the next few years. Still, it will take many years of above-trend growth to return the economy to full employment. In terms of infation, a stronger dollar, lower commodity prices, weaker import prices, and signifcant slack in labor and goods markets should keep infation somewhat below the FOMC’s 2 percent infation target for the next few years. Respondent 15: While the recent mixed news on economic activity has led me to modestly lower my medium-term growth forecast, I continue to expect the economy to recover at a moderate rate from the second half of 2012 through 2014. The forces supporting recovery include considerable monetary stimulus and the economy’s usual self-correcting forces. The headwinds holding back the recovery include consumer de-leveraging, fscal restraint, and uncertainty about conditions in Europe. In this environment, I expect infation to remain slightly below 2 percent throughout the forecast horizon. This projection refects recent PCE price trends, stable infation expectations, and slow growth in wages. With the job market still weak, there is unlikely to be much pressure on infation coming from wages over the next couple of years. Compared to conditions at the time of the April meeting, the uncertainty surrounding forecasts of GDP growth and unemployment has risen, primarily refecting the potential for a severe crisis in Europe and a fscal meltdown in the United States next year. The surprising dip in the unemployment rate earlier this year, and its uptick in May highlight the considerable uncertainty surrounding the outlook for unemployment. Overall, I believe that the uncertainty surrounding the growth and unemployment forecasts is elevated relative to the norms of the last 20 years. The risks to economic activity now seem to be primarily to the downside. A severe recession in Europe and the additional fnancial stress the recession could cause would signifcantly slow growth and raise unemployment in the United States. A failure of the United States to act in a timely way to avoid falling o a fscal cli could also signifcantly slow the economy. For infation, uncertainty remains higher than normal and the risks appear tilted toward the downside. There is the potential for the weakness of the economy to create more disinfation than I currently expect. Respondent 16: Incoming data point to a slowdown in the pace of growth of economic activity. Elevated uncertainty about the outlook in the Euro area is already a ecting the U.S. economy via lower equity valuations and increased risk premia. In such an environment, frms are likely to postpone hiring and large capital spending decisions. Recent readings on payrolls and on shipments and orders of capital goods are consistent with a slowdown in business spending. The large amount of slack in labor markets is also slowing wage growth noticeably. With little hiring and meager wage growth, gains in disposable income have been disappointing and favorable movements in food and energy prices are providing only a partial o set. As a result, near term gains in consumption are expected to be modest, with restraint coming also from the decline in equity valuations. The appreciation of the dollar and indications that worldwide growth is now slower than previously thought also signal less support to activity from net exports. Fiscal policy is contractionary already, and is expected to restrain growth even further next year. As important fscal deadlines near, a contentious process surrounding the direction of fscal policy is likely to add to an already uncertain environment. Given these conditions, economic activity is expected to grow over the rest of this year at a pace that is noticeably below potential. As a result, the unemployment rate is expected to edge up by 1 4 of one percentage point by the end of the year, to 8.4 percent. In response to the deteriorating economic conditions, additional monetary policy actions are undertaken via a continuation of the maturity extension program throughout the end of this year, and an additional round of securities purchases that expands the balance sheet by $500 billion. The increased monetary policy stimulus eventually places the economy on a better trajectory, with GDP growth expected to accelerate next year. Nevertheless, by the end of 2013 the unemployment rate is still above 8 percent, as uncertainty Authorized for Public Release – Page 32 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 is expected to dissipate only gradually. Economic activity is projected to pick up more strongly in 2014, when fscal conditions also become more supportive to growth. With considerable slack in the labor market, infation remains below the 2 percent target over the course of the forecast horizon. Risks to the projection for real activity are importantly weighted to the downside. The baseline outlook still assumes that policy steps are taken in Europe to contain the crisis, but recent developments indicate that the probability of additional fnancial stress from the Euro area remains uncomfortably high. A further worsening of the Euro area crisis than is currently embedded in my modal forecast is a scenario that represents much more than a tail risk at this point. Another important downside risk to economic growth stems from the possibility of more U.S. fscal tightening than is assumed in my baseline outlook. Respondent 17: The economy continues to work against relatively strong currents including household deleveraging and cautious spending, fat home prices, and fscal restraint at all levels of government. Elevated uncertainty about Europe, U.S. fscal concerns, and persistence of recent weak indicators is damping the demand for expansion of net new capital and jobs. Slow jobs growth will provide restraint to consumer spending over the medium term. Respondent 18: My thinking is dominated by the enormous uncertainty currently associated with the situation in Europe, as well as with the looming fscal cli in the US. These make it diÿcult to think in terms of simply a modal outlook. However, in attempting to do so, I have made a couple of assumptions. First, in the relatively near term, the expected degree of drag created by this uncertainty seems like it is well captured by the Tealbook baseline model, through e.g. the channels that emphasize the recent appreciation of the dollar and decline of the stock market. Second, over a somewhat longer horizon, I am projecting slightly faster growth than the Tealbook baseline. One reason is because I think that some of the most recent asset-price movements driving the Tealbook forecast are likely to be partially reversed over time, as they refect changes in discount rates/risk premia due to a fight-to-quality e ect. In the case of FX and net exports for example, this corresponds to the assumption that the medium-horizon e ects will be slightly muted relative to the Tealbook case. Also, to the extent that uncertainty is reducing corporate investment via an option-value waitingto-invest channel, this implies that as uncertainty is resolved (and assuming the news is on average neither good nor bad) investment should grow faster than it otherwise would, given the backlog of accumulated projects that were deferred. The Tealbook baseline did not appear to build in this e ect, since it lowered both near-term and more distant forecasts of corporate investment as compared to the April forecast. Given this observation, I upped my forecast slightly relative to the Tealbook baseline. Respondent 19: The basic story hasn’t changed very much over the past several months. Drags on growth from excess housing and excess household debt continue to ease. However, cuts in government purchases, prospective tax increases, and regulatory uncertainty are limiting the pace of the expansion and are retarding the impact of already accommodative monetary policy. In addition, downside risks stemming from economic and fnancial problems in Europe have increased. We’ve seen confrmation of slower growth in the emerging-market economies. In the U.S., business confdence is on the rise, but businesses remain inclined to hold higher levels of cash than normal both o shore and domestically as a hedge against fscal and regulatory uncertainty. Small and medium sized business feel especially stymied. The e ect is to restrain job creation and domestic CAPEX. The pace of the recovery is unlikely to accelerate until next year, when some of the non-monetary uncertainties currently restraining growth will have been resolved. Authorized for Public Release – Page 33 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Forecast Narratives (continued) 4(b). Please describe the key factors causing your forecast to change since the previous SEP. Respondent 1: The incoming data are adding up to a weaker frst half of 2012 than in our previous projection. Importantly, though we thought some of the frst-quarter gains would prove ephemeral, the labor market has softened more than we expected. Business spending also has been below our expectation. The sharp decline in Treasury rates, increases in high yield debt spreads, and anecdotal reports from our contacts indicate a notable increase in caution on the part of investors and nonfnancial businesses. More importantly, we have made some fundamental reassessments about the risks facing the economy, and changed our outlook to move those risks more into balance. First, we took another look at our assumptions regarding the political response to the “fscal cli ,” and built in a greater degree of restraint than in our previous projection–reducing real GDP growth in 2013 by about 12 percentage point from our April submission. Second, we have taken a more pessimistic view about the prospects for Europe. Third, we think the e ects of the fow of bad news from these events will have a greater depressing e ect on business and household spending than in our previous projection. Finally, we made some modest downward revisions to our estimates of potential output growth. The sharp decline in oil prices point to lower PCE infation in 2012 that in our last forecast. In addition to the lower energy prices, we have nicked down our projection of core PCE to refect the somewhat higher degree of slack in our current projection. Respondent 2: Relative to the previous SEP, I expect a slower pace of recovery in 2012 and 2013. Recent data releases suggest that the current pace of expansion is slower than previously expected. The heightened level of uncertainty emanating from Europe combined with rising concerns about the fscal cli appear to be holding back consumers and businesses as they wait to see how these issues are resolved. With a slower pace of economic expansion, I expect less improvement in the unemployment rate over the forecast horizon, and I have revised down my forecast for infation (headline and core) by about a tenth of a percentage point. Respondent 3: A number of real activity indicators released during the intermeeting period indicate that economic conditions were weaker than we anticipated. Consumer spending indicators, while on net having little e ect on the current quarter forecast, indicate less momentum in coming quarters. Also, as in the Tealbook, the downward revision of compensation indicates somewhat less consumption momentum. In addition, investment indicators were weak, and we have lowered our business fxed investment forecast for 2012-13. The weak data on government expenditures have led us to lower our projections for those expenditures over the near term. Finally, the recent weak labor market reports and renewed strains in fnancial conditions also suggest less overall momentum for real growth over the next few quarters. Because of the sharp declines in oil and gasoline prices as well as the decreases in headline measures recently, we have reduced our projections for headline infation over the next few quarters, particularly over the near term. With core infation measures little changed in recent months, there is little revision to our core PCE infation projection. The unemployment rate in May was somewhat above our anticipation at the time of the April meeting and the recent labor market indicators point to noticeably less momentum in the labor market than at the time of the April FOMC meeting. We thus have moved up our projected path for the unemployment rate, although we still expect the unemployment rate to fall relatively quickly in 2013-14. In regard to our risk assessment, we see more downside risks and somewhat less upside risks to real activity and infation than we did in April. These shifts refect the escalation of the European crisis, Authorized for Public Release – Page 34 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 slower growth in a number of other countries, falling commodity prices, and indications of greater strain in fnancial markets. In particular, we have increased the probability of fnancial market impairment leading to a global credit crunch and a severe global recession. As a consequence, our risk assessment for infation at medium term horizons has shifted from roughly balanced to a downside skew. For real activity, the balance of risks has shifted further to the downside. Respondent 4: Incoming data–particularly data on consumer spending and income, foreign economic growth, and the tightening of fnancial conditions resulting from lower equity prices and a strong dollar caused me to revise down my estimate of GDP growth and to raise my forecast for unemployment. I have revised down my estimate of infation due in part to the decline in oil prices and also as a result of somewhat greater slack in the economy. Respondent 5: I have downgraded my assessment of the pace of real GDP growth since the previous SEP. The most important development has been the signifcant uncertainty surrounding developments in Europe. As of today, the Greek elections have not been completed, central banks are wrestling with a response if any to developments in Europe, and the UK has announced BOE intervention. These uncertainties, and their e ect on business and consumer confdence, will continue at least as long as the deterioration in Europe continues, which I assume will be at least through the end of the year. Given already high uncertainties in the US from factors related to the housing market, fscal policy, the election year and long-term unemployment, I believe there will be enhanced e ects on expectation channels. Respondent 6: Europe, plus disappointing incoming data across many fronts, though the latter are probably attributable in no small part to the former Respondent 7: The shift in the Beveridge curve has proven to be persistent. It has led me to shift my estimate of the long-run NAIRU up. Perhaps more importantly, my uncertainty about the long-run NAIRU has risen - I would now say that a long-run NAIRU as high as 7% is entirely possible. Respondent 8: My forecasts have changed little. Forecasts for 2012 have changed because of recent information indicating slower growth and lower headline infation. Respondent 9: The data on consumer spending, income, and employment have been weaker than I expected, and energy prices have fallen sooner and more rapidly than I expected. Uncertainty regarding the resolution of federal fscal diÿculties is having a greater restraining e ect on activity than I had thought. Respondent 10: I’ve marked down 2012 growth refecting the somewhat weaker recent data, including employment and income. Respondent 11: The TealBook forecast for housing now is much closer to my own. Signifcant downgrade in expectations for the government and external sectors. Respondent 12: I had anticipated relatively weak economic growth and a reassertion of Okun’s Law in the labor market, which appears to have been confrmed, but in addition we have seen 1) a range of weaker data then expected (consumption, employment, IP, household and business surveys) and 2) a signifcant worsening of fnancial conditions related to the situation in Europe. These latter two sets of factors have caused me to mark down expected growth and to increase expected unemployment commensurately. I also lowered potential growth a tenth. Infation forecasts are not much changed. Authorized for Public Release – Page 35 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Respondent 13: Escalating fnancial stress from Europe; strong evidence of slowing growth here and abroad. Respondent 14: Since April, the economic data and news about the European sovereign debt crisis have been disappointing. Although U.S. output growth has been continuing at a moderate pace, the economy appears to have lost momentum. My projection for the global economy has deteriorated, with conditions in Europe looking notably worse. There is considerable uncertainty about how the European situation will evolve, with considerable risk that the crisis could intensify. These concerns have weighed on fnancial markets, where equity prices have slid, risk spreads (especially for high-yield securities) have widened, and the dollar has strengthened. With growth only slightly above trend, I expect even slower progress towards reducing the sizeable unemployment gap than I did in April. Data on core infation have been in line with my expectations and I have not materially changed my forecast for core infation. In contrast, the sharp declines in oil and gasoline prices caused me to lower my forecast for overall infation in 2012. Respondent 15: I have adjusted my forecast primarily in response to the news of the inter-meeting period that has been mixed, but generally a little weaker than I expected. I see this news as bearing primarily on the growth rate of the frst half of this year but having some implications for growth over the medium term. Coupled with the recent infation data that have come in somewhat softer than I expected, the modestly weaker pace of recovery is likely to be associated with slower growth of wage costs and a path of infation that is a little lower than my April projection. Overall, with these revisions, my current forecast is quite similar to my forecast at the time of the January meeting. Respondent 16: The worsening of the crisis in the Euro area and the associated fnancial spillovers to the U.S. economy are the main reasons for the downward revision to the real outlook since the April projections. Given the weaker outlook for GDP growth, the outlook for infation has also been revised down. Respondent 17: My forecast has incorporated weaker-than-expected second quarter growth numbers and a more signifcant drop in gasoline prices that has temporarily pulled infation downward. Global growth appears to be slowing more quickly than I anticipated and I have marked my U.S. growth estimates downward over the balance of 2012 and the frst half of 2013 as a result. Respondent 18: The single most important factor is the apparent deterioration of the situation in Europe. The recent weak labor-market reports have also played a role. Respondent 19: I’ve made a modest downward revision to my 2012 GDP growth forecast refecting recent marginally disappointing data releases, increased evidence of fscal authorities’ inability to act in a way that encourages job-creating activity, and increased concerns about euro-area fnancial stability and the outlook for real activity overseas. The weaker growth outlook abroad has put some downward pressure on oil and other commodity prices. Accordingly, I have lowered my 2012 headline infation forecast. Authorized for Public Release – Page 36 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Forecast Narratives (continued) 4(c). Please describe any important di erences between your current economic forecast and the Tealbook. Respondent 1: As noted in question 3, we assume more accommodative monetary policy than the Tealbook. As a result of this, and a touch higher assumption for potential output growth, we are projecting a larger pickup in GDP in 2014 than in the Tealbook. The more accommodative policy also contributes to our slightly higher projection for infation. Respondent 2: My forecast is now quite di erent from Tealbook in 2013 and 2014. I expect stronger growth, lower unemployment, and higher infation than are contained in the Tealbook forecast. Respondent 3: As stated in our response to question 3(e), we assume that the MEP is continued through the end of the year. Because of the greater duration in the balance sheet over the forecast horizon, we assume that term premia rise to normal levels more slowly than in the Tealbook. Over 2012H2 and 2013, the Tealbook assumes a weaker foreign growth outlook and somewhat more dollar appreciation than in our projection. Consequently, net exports is a drag to GDP growth in the Tealbook forecast while it is a modestly positive contributor in our central projection. In addition, the Tealbook sees a somewhat greater reluctance of frms to engage in fxed investment, resulting in a lower path for business fxed investment than in our projection. We see some of the headwinds restraining economic growth subsiding more quickly in 2014 than in the Tealbook. Thus we expect the output gap to begin to close more quickly that year, and our 2014 real GDP growth forecast is above that of the Tealbook. We see a stronger infuence of anchored infation expectations on infation dynamics than does the Tealbook. Consequently, our infation forecast and the Tealbook forecast are similar for 2012, but beyond that we see total and core infation remaining near 2% whereas the Tealbook has infation declining in 2013 and remaining near the 2013 level in 2014. We expect a somewhat greater decline in the unemployment rate than is projected in the Tealbook. The source of this di erence is a di erent interpretation of labor market dynamics as expansions mature; that is, we do not place as much weight on Okun’s Law as the Board sta do. Although both the Tealbook and our outlook now see a downside balance of risks to real growth, we di er in the assessment of infation risks and uncertainty. The Tealbook sees the infation risks as broadly balanced with uncertainty at a near normal level, refecting the stability of infation expectations in recent years. In contrast, we see a downside balance of risks to infation at medium-term horizons and high uncertainty around our projections. This assessment refects our view that the recent economic and fnancial developments point to a higher risk of a global credit crunch and/or severe recession that could lead to a substantial decline in infation. Respondent 4: Aside from the di erence in my monetary policy assumption from Tealbook, there are no meaningful di erences in my assessment of current economic trends. Respondent 5: N/A Respondent 6: A bit uncharacteristically, I’m rather close to the sta projections. Perhaps my relative pessimism has been infectious. Respondent 7: I expect unemployment to be lower at the end of 2014 and infation to be higher. Authorized for Public Release – Page 37 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Respondent 8: For 2012 and 2013 I anticipate relatively faster GDP growth. For 2013 and 2014 I anticipate relatively lower unemployment and relatively higher infation. Respondent 9: My forecasts for real GDP and the unemployment are fairly close to the Tealbook’s over the near term, but are somewhat than the Tealbook’s farther out. My infation forecast is higher since my energy price forecast is a touch higher in the second half of this year, and also because I put less weight on slack as a determinant of infation. Respondent 10: My forecast calls for a stronger economy over the next two years and tighter monetary policy than the Tealbook. Respondent 11: N/A Respondent 12: I am a bit more pessimistic on growth and unemployment than the Tealbook, given that we have now seen a pattern of near-trend growth for three years without acceleration. There are few obvious drivers for acceleration. The drags on growth have changed (fscal has gone from positive to negative; Europe has emerged as a problem even as domestic banking conditions have improved; housing has become a minor positive) but overall the headwinds to recovery are probably no less strong today then they were a couple of years ago. Resolution of Europe could support some pickup in growth, but the timing of such a resolution is diÿcult to predict and could be some time in the future. All that said, there are not large di erences between the broad contours of this forecast and the Tealbook. Respondent 13: I generally agree with the Tealbook baseline narrative and forecast for 2012. I assume moderately faster growth in 2013 and 2014, which produces faster declines in unemployment. This depends on real progress in Europe as well as the absence of additional shocks. I have also forecast slightly higher infation for 2013 and 2014, due to higher growth and a belief that expectations are well grounded at around 2.. Respondent 14: My forecast is broadly similar to the Tealbook projection, with the main di erence being that I expect infation to run a few tenths higher than in the TB in 2013 and 2014. Respondent 15: I do not see the latest employment report signaling a signifcant downshift in the labor market’s already slow trajectory. Further, despite the substantial uncertainty surrounding the situation in Europe and the fscal discord in the US, I don’t see these events weighing as heavily on my baseline forecast. As such, my second half of 2012 and my 2013 growth forecasts are a little over 12 percentage point above the TB projection. These di erences leave my unemployment rate projection 0.4 percentage points below TB’s by end of 2014. Respondent 16: The near-term outlook is weaker than in the Tealbook. This more pessimistic assessment of underlying economic conditions prompts a more accommodative stance of policy than what is embedded in the Tealbook. Ultimately, the economy benefts from this additional stimulus and growth in the medium term is somewhat faster than in the Tealbook. By the end of 2014, there is little di erence in the projected level of the unemployment rate between the two forecasts. Respondent 17: The broad contours of the Tealbook outlook are similar to my own. However, the magnitude of my forecast markdown is smaller than what has been incorporated into the June Tealbook, and I anticipate a faster, though still gradual, recovery in domestic spending and labor markets. I also project infation to follow a path closer to our longer-term infation objective owing Authorized for Public Release – Page 38 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 to a more moderate drop in oil prices and a strong adherence of price growth to longer-term infation expectations. Respondent 18: The di erences are modest. My forecasts for GDP growth and unemployment in 2013 and 2014 are slightly more optimistic than in the Tealbook. Respondent 19: I see a somewhat faster pace of recovery than is called for in the Tealbook baseline forecast, and a higher infation path. These di erences imply there is less need for accommodative monetary policy. Authorized for Public Release – Page 39 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2012–14 and over the longer run Number of participants April Tealbook 2012 June projections April projections 20 18 16 14 12 10 8 6 4 2 June Tealbook 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.0 4.1 4.2 4.3 Percent range Number of participants 2013 1.6 1.7 April Tealbook June Tealbook 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 20 18 16 14 12 10 8 6 4 2 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.0 4.1 4.2 4.3 Percent range Number of participants 2014 June Tealbook 20 18 16 14 12 10 8 6 4 2 April Tealbook 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.0 4.1 4.2 4.3 Percent range Number of participants Longer run 1.6 1.7 1.8 1.9 20 18 16 14 12 10 8 6 4 2 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Percent range Note: Definitions of variables are in the general note to table 1. Authorized for Public Release – Page 40 of 46 3.8 3.9 4.0 4.1 4.2 4.3 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2012–14 and over the longer run Number of participants 2012 June Tealbook April Tealbook June projections April projections 4.8 4.9 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.0 8.1 8.2 8.3 20 18 16 14 12 10 8 6 4 2 8.4 8.5 Percent range Number of participants 2013 June Tealbook 20 18 16 14 12 10 8 6 4 2 April Tealbook 4.8 4.9 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.0 8.1 8.2 8.3 8.4 8.5 Percent range Number of participants 2014 4.8 4.9 June Tealbook April Tealbook 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 20 18 16 14 12 10 8 6 4 2 7.8 7.9 8.0 8.1 8.2 8.3 8.4 8.5 Percent range Number of participants Longer run 4.8 4.9 5.0 5.1 20 18 16 14 12 10 8 6 4 2 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 Percent range Note: Definitions of variables are in the general note to table 1. Authorized for Public Release – Page 41 of 46 7.8 7.9 8.0 8.1 8.2 8.3 8.4 8.5 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2012–14 and over the longer run Number of participants April Tealbook 2012 June projections April projections 20 18 16 14 12 10 8 6 4 2 June Tealbook 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 Percent range Number of participants June and April Tealbook 2013 1.1 1.2 1.3 1.4 1.5 1.6 20 18 16 14 12 10 8 6 4 2 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 Percent range Number of participants June and April Tealbook 2014 1.1 1.2 1.3 1.4 1.5 1.6 20 18 16 14 12 10 8 6 4 2 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 Percent range Number of participants Longer run 1.1 1.2 20 18 16 14 12 10 8 6 4 2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 Percent range Note: Definitions of variables are in the general note to table 1. Authorized for Public Release – Page 42 of 46 2.1 2.2 2.3 2.4 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2012–14 Number of participants 2012 20 June and April Tealbook June projections April projections 18 16 14 12 10 8 6 4 2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 Percent range Number of participants 2013 June Tealbook 20 April Tealbook 18 16 14 12 10 8 6 4 2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 Percent range Number of participants 2014 June Tealbook 20 April Tealbook 18 16 14 12 10 8 6 4 2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 Percent range Note: Definitions of variables are in the general note to table 1. Authorized for Public Release – Page 43 of 46 2.1 2.2 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 3.E. Distribution of participants’ projections for the target federal funds rate, 2012–14 and over the longer run Number of participants 2012 June projections April projections June and April Tealbook 0.00 0.37 0.38 0.62 0.63 0.87 0.88 1.12 1.13 1.37 1.38 1.62 1.63 1.87 1.88 2.12 2.13 2.37 2.38 2.62 2.63 2.87 2.88 3.12 3.13 3.37 3.38 3.62 3.63 3.87 3.88 4.12 4.13 4.37 20 18 16 14 12 10 8 6 4 2 4.38 4.62 Percent range Number of participants 2013 20 18 16 14 12 10 8 6 4 2 June and April Tealbook 0.00 0.37 0.38 0.62 0.63 0.87 0.88 1.12 1.13 1.37 1.38 1.62 1.63 1.87 1.88 2.12 2.13 2.37 2.38 2.62 2.63 2.87 2.88 3.12 3.13 3.37 3.38 3.62 3.63 3.87 3.88 4.12 4.13 4.37 4.38 4.62 Percent range Number of participants 2014 0.00 0.37 April Tealbook June Tealbook 0.38 0.62 0.63 0.87 0.88 1.12 1.13 1.37 20 18 16 14 12 10 8 6 4 2 1.38 1.62 1.63 1.87 1.88 2.12 2.13 2.37 2.38 2.62 2.63 2.87 2.88 3.12 3.13 3.37 3.38 3.62 3.63 3.87 3.88 4.12 4.13 4.37 4.38 4.62 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 0.00 0.37 0.38 0.62 0.63 0.87 0.88 1.12 1.13 1.37 1.38 1.62 1.63 1.87 1.88 2.12 2.13 2.37 2.38 2.62 2.63 2.87 2.88 3.12 3.13 3.37 3.38 3.62 3.63 3.87 3.88 4.12 4.13 4.37 4.38 4.62 Percent range Note: The target federal funds rate is measured as the level of the target rate at the end of the calendar year or in the longer run. Authorized for Public Release – Page 44 of 46 SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 4. Uncertainty and risks in economic projections Number of participants Uncertainty about GDP growth 20 18 16 14 12 10 8 6 4 2 June projections April projections Lower Broadly similar Higher Number of participants Risks to GDP growth 20 18 16 14 12 10 8 6 4 2 June projections April projections Weighted to downside Broadly similar Number of participants Uncertainty about the unemployment rate Lower Broadly similar 20 18 16 14 12 10 8 6 4 2 Higher Number of participants Risks to the unemployment rate Weighted to downside Broadly similar Number of participants Uncertainty about PCE inflation Lower Broadly similar 20 18 16 14 12 10 8 6 4 2 Higher Lower Broadly similar Higher Weighted to upside Risks to PCE inflation Weighted to downside 20 18 16 14 12 10 8 6 4 2 20 18 16 14 12 10 8 6 4 2 Number of participants Broadly similar Number of participants Uncertainty about core PCE inflation Weighted to upside 20 18 16 14 12 10 8 6 4 2 Weighted to upside Number of participants Risks to core PCE inflation Weighted to downside Broadly similar Note: Definitions of variables are in the general note to table 1. Authorized for Public Release – Page 45 of 46 20 18 16 14 12 10 8 6 4 2 Weighted to upside SEP: Compilation and Summary of Individual Economic Projections June 19–20, 2012 Figure 5. Scatterplots of projections in the liftoff year (in percent) Unemployment rate PCE inflation 9.0 4.0 8.5 3.5 8.0 3.0 7.5 7.0 2.5 6.5 2.0 6.0 1.5 5.5 5.0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Change in real GDP 4.5 5.0 1.0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Change in real GDP 4.5 5.0 PCE inflation 4.0 3.5 3.0 Liftoff Year 2012 2.5 2013 2014 2.0 2015 1.5 1.0 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Unemployment rate 8.5 9.0 Note: When the projections of two or more participants are identical, larger markers, which represent one participant each, are used so that each projection can be seen. Authorized for Public Release – Page 46 of 46
@FedFRASER