Part 3: Summary of Economic Projections
Monetary Policy Report submitted to the Congress on July 7, 2017, pursuant to section 2B of the Federal Reserve Act
The following material appeared as an addendum to the minutes of the June 13-14, 2017, meeting of the Federal Open Market Committee.
In conjunction with the Federal Open Market Committee (FOMC) meeting held on June 13-14, 2017, meeting participants submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2017 to 2019 and over the longer run.8 Each participant's projection was based on information available at the time of the meeting, together with his or her assessment of appropriate monetary policy, including a path for the federal funds rate and its longer-run value, and assumptions about other factors likely to affect economic outcomes.9 The longer-run projections represent each participant's assessment of the value to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy.10 "Appropriate monetary policy" is defined as the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her individual interpretation of the Federal Reserve's objectives of maximum employment and stable prices.
All participants who submitted longer-run projections expected that, under appropriate monetary policy, growth in real gross domestic product (GDP) this year would run somewhat above their individual estimates of its longer-run rate. Over half of these participants expected that economic growth would slow a bit in 2018, and almost all of them expected that in 2019 economic growth would run at or near its longer-run level. All participants who submitted longer-run projections expected that the unemployment rate would run below their estimates of its longer-run normal level in 2017 and remain below that level through 2019. The majority of participants also lowered their estimates of the longer-run normal rate of unemployment by 0.1 to 0.2 percentage point. All participants projected that inflation, as measured by the four-quarter percentage change in the price index for personal consumption expenditures (PCE), would run below 2 percent in 2017 and then step up in the next two years; over half of them projected that inflation would be at the Committee's 2 percent objective in 2019, and all judged that inflation would be within a couple of tenths of a percentage point of the objective in that year. Table 1 and figure 1 provide summary statistics for the projections.
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, June 2017
| Variable | Median 1 | Central tendency 2 | Range3 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2018 | 2019 | Longer run | 2017 | 2018 | 2019 | Longer run | 2017 | 2018 | 2019 | Longer run | |
| Change in real GDP | 2.2 | 2.1 | 1.9 | 1.8 | 2.1-2.2 | 1.8-2.2 | 1.8-2.0 | 1.8-2.0 | 2.0-2.5 | 1.7-2.3 | 1.4-2.3 | 1.5-2.2 |
| March projection | 2.1 | 2.1 | 1.9 | 1.8 | 2.0-2.2 | 1.8-2.3 | 1.8-2.0 | 1.8-2.0 | 1.7-2.3 | 1.7-2.4 | 1.5-2.2 | 1.6-2.2 |
| Unemployment rate | 4.3 | 4.2 | 4.2 | 4.6 | 4.2-4.3 | 4.0-4.3 | 4.1-4.4 | 4.5-4.8 | 4.1-4.5 | 3.9-4.5 | 3.8-4.5 | 4.5-5.0 |
| March projection | 4.5 | 4.5 | 4.5 | 4.7 | 4.5-4.6 | 4.3-4.6 | 4.3-4.7 | 4.7-5.0 | 4.4-4.7 | 4.2-4.7 | 4.1-4.8 | 4.5-5.0 |
| PCE inflation | 1.6 | 2.0 | 2.0 | 2.0 | 1.6-1.7 | 1.8-2.0 | 2.0-2.1 | 2.0 | 1.5-1.8 | 1.7-2.1 | 1.8-2.2 | 2.0 |
| March projection | 1.9 | 2.0 | 2.0 | 2.0 | 1.8-2.0 | 1.9-2.0 | 2.0-2.1 | 2.0 | 1.7-2.1 | 1.8-2.1 | 1.8-2.2 | 2.0 |
| Core PCE inflation4 | 1.7 | 2.0 | 2.0 | 1.6-1.7 | 1.8-2.0 | 2.0-2.1 | 1.6-1.8 | 1.7-2.1 | 1.8-2.2 | |||
| March projection | 1.9 | 2.0 | 2.0 | 1.8-1.9 | 1.9-2.0 | 2.0-2.1 | 1.7-2.0 | 1.8-2.1 | 1.8-2.2 | |||
| Memo: Projected appropriate policy path | ||||||||||||
| Federal funds rate | 1.4 | 2.1 | 2.9 | 3.0 | 1.1-1.6 | 1.9-2.6 | 2.6-3.1 | 2.8-3.0 | 1.1-1.6 | 1.1-3.1 | 1.1-4.1 | 2.5-3.5 |
| March projection | 1.4 | 2.1 | 3.0 | 3.0 | 1.4-1.6 | 2.1-2.9 | 2.6-3.3 | 2.8-3.0 | 0.9-2.1 | 0.9-3.4 | 0.9-3.9 | 2.5-3.8 |
Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes 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 projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. The March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 14-15, 2017. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate in conjunction with the March 14-15, 2017, meeting, and one participant did not submit such projections in conjunction with the June 13-14, 2017, meeting.
1. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. Return to table
2. The central tendency excludes the three highest and three lowest projections for each variable in each year. Return to table
3. The range for a variable in a given year includes all participants' projections, from lowest to highest, for that variable in that year. Return to table
4. Longer-run projections for core PCE inflation are not collected. Return to table
As shown in figure 2, participants generally expected that evolving economic conditions would likely warrant further gradual increases in the federal funds rate to achieve and sustain maximum employment and 2 percent inflation. Although some participants raised or lowered their federal funds rate projections since March, the median projections for the federal funds rate in 2017 and 2018 were essentially unchanged, and the median projection in 2019 was slightly lower; the median projection for the longer-run federal funds rate was unchanged. However, the economic outlook is uncertain, and participants noted that their economic projections and assessments of appropriate monetary policy could change in response to incoming information.
In general, participants viewed the uncertainty attached to their projections as broadly similar to the average of the past 20 years, although a couple of participants saw the uncertainty associated with their real GDP growth forecasts as higher than average. Most participants judged the risks around their projections for economic growth, the unemployment rate, and inflation as broadly balanced.
Figures 4.A through 4.C for real GDP growth, the unemployment rate, and inflation, respectively, present "fan charts" as well as charts of participants' current assessments of the uncertainty and risks surrounding the economic projections. The fan charts (the panels at the top of these three figures) show the median projections surrounded by confidence intervals that are computed from the forecast errors of various private and government projections made over the past 20 years. The width of the confidence interval for each variable at a given point is a measure of forecast uncertainty at that horizon. For all three macroeconomic variables, these charts illustrate that forecast uncertainty is substantial and generally increases as the forecast horizon lengthens. Reflecting, in part, the uncertainty about the future evolution of GDP growth, the unemployment rate, and inflation, participants' assessments of appropriate monetary policy are also subject to considerable uncertainty. To illustrate the uncertainty regarding the appropriate path for monetary policy, figure 5 shows a comparable fan chart around the median projections for the federal funds rate.11 As with the macroeconomic variables, forecast uncertainty for the federal funds rate is substantial and increases at longer horizons.
The Outlook for Economic Activity
The median of participants' projections for the growth rate of real GDP, conditional on their individual assumptions about appropriate monetary policy, was 2.2 percent in 2017, 2.1 percent in 2018, and 1.9 percent in 2019; the median of projections for the longer-run normal rate of real GDP growth was 1.8 percent. Compared with the March Summary of Economic Projections (SEP), the medians of the forecasts for real GDP growth over the period from 2017 to 2019, as well as the median assessment of the longer-run growth rate, were mostly unchanged. Fewer than half of the participants incorporated expectations of fiscal stimulus into their projections, and a couple indicated that they had marked down the magnitude of expected fiscal stimulus relative to March.
All participants revised down their projections for the unemployment rate in the fourth quarter of 2017 and of 2018, and almost all also revised down their projections for the unemployment rate in the fourth quarter of 2019. Many who did so cited recent lower-than-expected readings on unemployment. The median of the projections for the unemployment rate was 4.3 percent in 2017 and 4.2 percent in each of 2018 and 2019, 0.2 percentage point and 0.3 percentage point lower than in the March projections, respectively. The majority of participants also revised down their estimates of the longer-run normal rate of unemployment by 0.1 or 0.2 percentage point, and the median longer-run level was 4.6 percent, down 0.1 percentage point from March.
Figure 3.A. and figure 3.B. show the distributions of participants' projections for real GDP growth and the unemployment rate from 2017 to 2019 and in the longer run. The distribution of individual projections for real GDP growth for this year shifted up, with some participants now expecting real GDP growth between 2.4 and 2.5 percent and none seeing it below 2 percent. The distributions of projected real GDP growth in 2018, 2019, and in the longer run were broadly similar to the distributions of the March projections. The distributions of individual projections for the unemployment rate shifted down noticeably for 2017 and 2018. Most participants projected an unemployment rate of 4.2 or 4.3 percent at the end of this year, and the majority anticipated an unemployment rate between 4.0 and 4.3 percent at the end of 2018. Participants' projections also shifted down in 2019 but were more dispersed than the distributions of their projected unemployment rates in the two earlier years. The distribution of projections for the longer-run normal unemployment rate shifted down modestly.
The Outlook for Inflation
The median of projections for headline PCE price inflation this year was 1.6 percent, down 0.3 percentage point from March. As in March, median projected inflation was 2.0 percent in 2018 and 2019. About half of the participants anticipated that inflation would continue to run a bit below 2 percent in 2018, while only one participant expected inflation above 2 percent in that year--and, in that case, just modestly so. More than half projected that inflation would be equal to the Committee's objective in 2019. A few participants projected that inflation would run slightly below 2 percent in that year, while several projected that it would run a little above 2 percent. The median of projections for core PCE price inflation was 1.7 percent in 2017, a decline of 0.2 percentage point from March; the median projection for 2018 and 2019 was 2.0 percent, as in the March projections.
Figure 3.C. and figure 3.D. provide information on the distributions of participants' views about the outlook for inflation. The distributions of projections for headline PCE price inflation and for core PCE price inflation in 2017 shifted down noticeably from March, while the distributions for both measures of inflation in 2018 shifted down slightly. Many participants cited recent surprisingly low readings on inflation as a factor contributing to the revisions in their inflation forecasts.
Appropriate Monetary Policy
Figure 3.E. provides the distribution of participants' judgments regarding the appropriate target or midpoint of the target range for the federal funds rate at the end of each year from 2017 to 2019 and over the longer run.12 The distribution for 2017 was less dispersed than that in March, while the distribution for 2018 was slightly less dispersed. The distributions in 2019 and in the longer run were broadly similar to those in March. The median projections of the federal funds rate continued to show gradual increases, with the median assessment for 2017 standing at 1.38 percent, consistent with three 25 basis point increases this year. Thereafter, the medians of the projections were 2.13 percent at the end of 2018 and 2.94 percent at the end of 2019; the median of the longer-run projections of the federal funds rate was 3.00 percent.
In discussing their June projections, many participants continued to express the view that the appropriate upward trajectory of the federal funds rate over the next few years would likely be gradual. That anticipated pace reflected a few factors, such as a neutral real interest rate that was currently low and was expected to move up only slowly as well as a gradual return of inflation to the Committee's 2 percent objective. Several participants judged that a slightly more accommodative path of monetary policy than in their previous projections would likely be appropriate, citing an apparently slower rate of progress toward the Committee's 2 percent inflation objective. In their discussions of appropriate monetary policy, half of the participants commented on the Committee's reinvestment policy; all of those who did so expected a change in reinvestment policy before the end of this year.
Uncertainty and Risks
Projections of economic variables are subject to considerable uncertainty. In assessing the path of monetary policy that, in their view, is likely to be most appropriate, FOMC participants take account of the range of possible outcomes, the likelihood of those outcomes, and the potential benefits and costs to the economy should they occur. Table 2 provides one measure of forecast uncertainty for the change in real GDP, the unemployment rate, and total consumer price inflation--the root mean squared error (RMSE) for forecasts made over the past 20 years. This measure of forecast uncertainty is incorporated graphically in the top panels of figures 4.A, 4.B, and 4.C, which display fan charts plotting the median SEP projections for the three variables surrounded by symmetric confidence intervals derived from the RMSEs presented in table 2. If the degree of uncertainty attending these projections is similar to the typical magnitude of past forecast errors and if the risks around the projections are broadly balanced, future outcomes of these variables would have about a 70 percent probability of occurring within these confidence intervals. For all three variables, this measure of forecast uncertainty is substantial and generally increases as the forecast horizon lengthens.
Table 2. Average historical projection error ranges
Percentage points
| 2017 | 2018 | 2019 | |
|---|---|---|---|
| Change in real GDP1 | ±1.4 | ±2.0 | ±2.2 |
| Unemployment rate1 | ±0.4 | ±1.2 | ±1.8 |
| Total consumer prices2 | ±0.8 | ±1.0 | ±1.0 |
| Short-term interest rates3 | ±0.7 | ±2.0 | ±2.2 |
Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1997 through 2016 that were released in the summer by various private and government forecasters. As described in the box "Forecast Uncertainty," under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, consumer prices, and the federal funds rate will be in ranges implied by the average size of projection errors made in the past. For more information, see David Reifschneider and Peter Tulip (2017), "Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve's Approach," Finance and Economics Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), available at www.federalreserve.gov/econresdata/feds/2017/files/2017020pap.pdf.
1. Definitions of variables are in the general note to table 1. Return to table
2. Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projection is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. Return to table
3. For Federal Reserve staff forecasts, measure is the federal funds rate. For other forecasts, measure is the rate on 3-month Treasury bills. Historical projections are the average level, in percent, in the fourth quarter of the year indicated. Return to table
FOMC participants may judge that the width of the historical fan charts shown in figures 4.A through 4.C does not adequately capture their current assessments of the degree of uncertainty that surrounds their economic projections. Participants' assessments of the current level of uncertainty surrounding their economic projections are shown in the bottom-left panels of figure 4.A., figure 4.B., and figure 4.C.. All or nearly all participants viewed the uncertainty attached to their economic projections as broadly similar to the average of the past 20 years, with three fewer participants than in March seeing uncertainty about GDP growth, the unemployment rate, and inflation as higher than its historical average.13 In their discussion of the uncertainty attached to their current projections, most participants again expressed the view that, at this point, uncertainty surrounding prospective changes in fiscal and other government policies is very large or that there is not yet enough information to make reasonable assumptions about the timing, nature, and magnitude of the changes.
The fan charts--which are constructed so as to be symmetric around the median projections--also may not fully reflect participants' current assessments of the balance of risks to their economic projections. Participants' assessments of the balance of risks to their economic projections are shown in the bottom-right panels of figures 4.A, 4.B, and 4.C. As in March, most participants judged the risks to their projections of real GDP growth, the unemployment rate, headline inflation, and core inflation as broadly balanced--in other words, as broadly consistent with a symmetric fan chart. Three participants judged the risks to the unemployment rate as weighted to the downside, and one participant judged the risks as weighted to the upside (as shown in the lower-right panel of figure 4.B). In addition, the balance of risks to participants' inflation projections shifted down slightly from March (shown in the lower-right panels of figure 4.C), as two fewer participants judged the risks to inflation to be weighted to the upside and two more viewed the risks as weighted to the downside.
Participants' assessments of the future path of the federal funds rate consistent with appropriate policy are also subject to considerable uncertainty, reflecting in part uncertainty about the evolution of GDP growth, the unemployment rate, and inflation over time. The final line in table 2 shows the RMSEs for forecasts of short-term interest rates. These RMSEs are not strictly consistent with the SEP projections for the federal funds rate, in part because the SEP projections are not forecasts of the likeliest outcomes but rather reflect each participant's individual assessment of appropriate monetary policy. However, the associated confidence intervals provide a sense of the likely uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables and additional adjustments to monetary policy that may be appropriate to offset the effects of shocks to the economy.
Figure 5 shows a fan chart plotting the median SEP projections for the appropriate path of the federal funds rate surrounded by confidence intervals derived from the results presented in table 2. As with the macroeconomic variables, forecast uncertainty is substantial and increases at longer horizons.14
Forecast Uncertainty
The economic projections provided by the members of the Board of Governors and the presidents of the Federal Reserve Banks inform discussions of monetary policy among policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections, however. The economic and statistical models and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future path of the economy can be affected by myriad unforeseen developments and events. Thus, in setting the stance of monetary policy, participants consider not only what appears to be the most likely economic outcome as embodied in their projections, but also the range of alternative possibilities, the likelihood of their occurring, and the potential costs to the economy should they occur.
Table 2 summarizes the average historical accuracy of a range of forecasts, including those reported in past Monetary Policy Reports and those prepared by the Federal Reserve Board's staff in advance of meetings of the Federal Open Market Committee (FOMC). The projection error ranges shown in the table illustrate the considerable uncertainty associated with economic forecasts. For example, suppose a participant projects that real gross domestic product (GDP) and total consumer prices will rise steadily at annual rates of, respectively, 3 percent and 2 percent. If the uncertainty attending those projections is similar to that experienced in the past and the risks around the projections are broadly balanced, the numbers reported in table 2 would imply a probability of about 70 percent that actual GDP would expand within a range of 1.6 to 4.4 percent in the current year, 1.0 to 5.0 percent in the second year, and 0.8 to 5.2 percent in the third year. The corresponding 70 percent confidence intervals for overall inflation would be 1.2 to 2.8 percent in the current year, and 1.0 to 3.0 percent in the second and third years. Figures 4.A through 4.C illustrate these confidence bounds in "fan charts" that are symmetric and centered on the medians of FOMC participants' projections for GDP growth, the unemployment rate, and inflation. However, in some instances, the risks around the projections may not be symmetric. In particular, the unemployment rate cannot be negative; furthermore, the risks around a particular projection might be tilted to either the upside or the downside, in which case the corresponding fan chart would be asymmetrically positioned around the median projection.
Because current conditions may differ from those that prevailed, on average, over history, participants provide judgments as to whether the uncertainty attached to their projections of each economic variable is greater than, smaller than, or broadly similar to typical levels of forecast uncertainty seen in the past 20 years, as presented in table 2 and reflected in the widths of the confidence intervals shown in the top panels of figures 4.A through 4.C. Participants' current assessments of the uncertainty surrounding their projections are summarized in the bottom-left panels of those figures. Participants also provide judgments as to whether the risks to their projections are weighted to the upside, are weighted to the downside, or are broadly balanced. That is, while the symmetric historical fan charts shown in the top panels of figures 4.A through 4.C imply that the risks to participants' projections are balanced, participants may judge that there is a greater risk that a given variable will be above rather than below their projections. These judgments are summarized in the lower-right panels of figures 4.A through 4.C.
As with real activity and inflation, the outlook for the future path of the federal funds rate is subject to considerable uncertainty. This uncertainty arises primarily because each participant's assessment of the appropriate stance of monetary policy depends importantly on the evolution of real activity and inflation over time. If economic conditions evolve in an unexpected manner, then assessments of the appropriate setting of the federal funds rate would change from that point forward. The final line in table 2 shows the error ranges for forecasts of short-term interest rates. They suggest that the historical confidence intervals associated with projections of the federal funds rate are quite wide. It should be noted, however, that these confidence intervals are not strictly consistent with the projections for the federal funds rate, as these projections are not forecasts of the most likely quarterly outcomes but rather are projections of participants' individual assessments of appropriate monetary policy and are on an end-of-year basis. However, the forecast errors should provide a sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that would be appropriate to offset the effects of shocks to the economy.
If at some point in the future the confidence interval around the federal funds rate were to extend below zero, it would be truncated at zero for purposes of the fan chart shown in figure 5; zero is the bottom of the lowest target range for the federal funds rate that has been adopted by the Committee in the past. This approach to the construction of the federal funds rate fan chart would be merely a convention; it would not have any implications for possible future policy decisions regarding the use of negative interest rates to provide additional monetary policy accommodation if doing so were appropriate. In such situations, the Committee could also employ other tools, including forward guidance and asset purchases, to provide additional accommodation.
While figures 4.A through 4.C provide information on the uncertainty around the economic projections, figure 1 provides information on the range of views across FOMC participants. A comparison of figure 1 with figures 4.A through 4.C shows that the dispersion of the projections across participants is much smaller than the average forecast errors over the past 20 years.
Footnotes
8. Four members of the Board of Governors, one fewer than in March 2017, were in office at the time of the June 2017 meeting and submitted economic projections. The office of the president of the Federal Reserve Bank of Richmond was vacant at the time of this FOMC meeting; First Vice President Mark L. Mullinix submitted economic projections. Return to text
9. All participants submitted their projections in advance of the FOMC meeting; no projections were revised following the release of economic data on the morning of June 14. Return to text
10. One participant did not submit longer-run projections for real output growth, the unemployment rate, or the federal funds rate. Return to text
11. The fan chart for the federal funds rate depicts the uncertainty about the future path of appropriate monetary policy and is closely connected with the uncertainty about the future value of economic variables. In contrast, the dot plot shown in figure2 displays the dispersion of views across individual participants about the appropriate level of the federal funds rate. Return to text
12. One participant's projections for the federal funds rate, real GDP growth, the unemployment rate, and inflation were informed by the view that there are multiple possible medium-term regimes for the U.S. economy, that these regimes are persistent, and that the economy shifts between regimes in a way that cannot be forecast. Under this view, the economy currently is in a regime characterized by expansion of economic activity with low productivity growth and a low short-term real interest rate, but longer-term outcomes for variables other than inflation cannot be usefully projected. Return to text
13. At the end of this summary, the box "Forecast Uncertainty" discusses the sources and interpretation of uncertainty in the economic forecasts and explains the approach used to assess the uncertainty and risks attending the participants' projections. Return to text
14. If at some point in the future the confidence interval around the federal funds rate were to extend below zero, it would be truncated at zero for purposes of the chart shown in figure5; zero is the bottom of the lowest target range for the federal funds rate that has been adopted by the Committee in the past. This approach to the construction of the federal funds rate fan chart would be merely a convention and would not have any implication for possible future policy decisions regarding the use of negative interest rates to provide additional monetary policy accommodation if doing so were appropriate. Return to text