Should Rates Rise in 2015? Charles Evans Doesn’t Think So (Part 4 of 7)
Summary of Economic Projections
In four out of eight scheduled meetings, the FOMC (Federal Open Market Committee) releases an SEP (summary of economic projections). The SEP contains policymakers’ expected level of the following three indicators for the next three years:
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change in real GDP (gross domestic product)
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unemployment rate
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PCE (personal consumption expenditures) inflation
Keep in mind that projections for real GDP, PCE inflation, and core-PCE inflation are percentage changes from the fourth quarter of the previous year to the fourth quarter of the given year.
The table above provides the central tendency of the range policymakers expect for the growth of a given indicator. Central tendency excludes the outliers—the three highest and the three lowest projections—for all three indicators in each year.
As you can see from the table above, economic growth has scaled down a bit due to unexpectedly low consumer spending up to now. Expectations about the unemployment rate have become more aggressive and are in a tight range. However, expectations for PCE inflation have scaled down significantly for 2015 with even the core-PCE inflation seeing downward revisions.
Uncertain outlook
The downward revision has a lot to do with the uncertain outlook of crude oil prices (USO)(OIH). Also, wage growth is slow, and though it usually lags the business cycle, a pick-up would help increase consumer spending immensely. This effect would benefit department stores like Kohl’s (KSS), Sears (SHLD), and J.C. Penney (JCP), along with consumer-oriented ETFs like the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Consumer Staples Select Sector SPDR Fund (XLP).
2% in 2018?
Charles Evans said that he forecasts PCE inflation to get to 2% only in 2018. Do note that policymakers aren’t waiting for inflation to touch 2%. They just want to be confident enough that inflation is on the expected path towards 2% and that a rate hike won’t derail it from this path.
Given this low inflation level, what path would Charles Evans want monetary policy to take? Let’s look at that in the next article of this series.
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