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How to Read the Fed's Economic Projections Like a Pro?

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Investing with moomoo wrote a column · Dec 14, 2022 14:52
Fed raised rates by half a point at this meeting, but more noteworthy are their interest rate forecasts for 2023 - and beyond. Central bankers have been shifting their focus from how fast rates will rise to how high they will eventually climb and how long they will stay there.

Here's how to read the numbers released on Wednesday:

1. The dot plot
Source:Summary of Economic Projections December 14, 2022
Source:Summary of Economic Projections December 14, 2022
The dot plot shows the estimates by the Fed's 19 policymakers for interest rates at the end of 2022, along with the next several years and over the longer run. The forecasts are represented by dots arranged along a vertical scale.

Economists closely watch how the range of estimates is shifting, because it can give a hint to where policy is heading. Even so, they fixate most intently on the middle dot. That middle, or median, official is regularly quoted as the clearest estimate of where the central bank sees policy heading.

The most important trick for reading this dot plot? Pay attention to where the numbers fall in relation to the longer-run median projection. That number is sometimes called the natural rate, and it most recently stood at 2.5 percent. It represents the theoretical dividing line between easy and restrictive monetary policy.

The Fed can use the gap between the Fed funds rate and that so-called natural rate to signal how far they plan to go into economy-restricting territory and also how long they will stay there. At the moment, the question of how long interest rates will remain high is a particularly important one.

2. Unemployment projections will be key
Source:Summary of Economic Projections December 14, 2022
Source:Summary of Economic Projections December 14, 2022
Is the Fed expecting a much-higher jobless rate as it tries to counter rapid inflation? Table 1 of the economic projections will hold some answers.

The Fed has two jobs. It is supposed to achieve maximum employment and stable inflation. Unemployment has been very low, employers are hiring steadily, and wages have been rapid throughout 2022, so officials think that their full employment goal is more than satisfied. Inflation, on the other hand, is running at about three times their official target.

With this in mind, central bankers are now single-mindedly focused on bringing price increases back under control. But once the job market slows, unemployment begins to rise and wage growth slows - a sequence of events that officials believe is necessary to restore slow but steady price increases - a difficult phase for the Fed will begin. Central bankers will have to decide how much unemployment they are willing to tolerate, and may have to judge how to balance two conflicting objectives. From this table we can see the extent to which the Fed is willing to tolerate.

3. Watch the growth outlook

The road to higher unemployment is paved with slower growth. To force the job market to cool and inflation to moderate, Fed officials believe they must drag economic growth below its potential level - and the extent to which growth is expected to fall can send a signal of how punitive the Fed believes its policy will be. Right now, the Fed estimates that longer-run sustainable level to be about 1.8 percent, after adjusting for inflation.

4. Pro tip: Interpret inflation estimates cautiously

The inflation estimates in the Fed's projections typically do not offer a lot of insight.

If there is a hint of utility here, it is in how long the central bank thinks it will take to wrench prices back to target levels. As of December, Fed officials believe that core inflation -the number that excludes food and fuel costs to get a sense of underlying price patterns - will remain at 2.1 per cent in 2025.

But must the outcome be certain? It could be a long road back to normal, even in an ideal world.

Full link of Summary of Economic Projections: Summary of Economic Projections

Source: Summary of Economic Projections December 14, 2022
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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  • 70784737 : It reads “we are win a recession and lying about it”

  • StlCtyPreach : The Gov will use the illegal immigrants to fill the jobs hole and then modern monetary theory kicks in. #PrepareNow #NotYourKeys