DFAS - An Optimistic Fed Forecast
- While the Fed forecasts tend to help market participants understand the future course of policy, they should also be looked at with a dose of skepticism.
- The projections are as much a product of econometric models as they are an attempt for the Fed to guide the markets (and economy) in a direction that they want, often regardless of the economic realities.
- The Board’s forecasts for their preferred measure of inflation (Core PCE) seemed especially optimistic and is at odds with market expectations, showing that inflation will likely come below 3 percent by 2023.
By Thomas Triedman
In conjunction with the Fed's June meeting, during which the Federal Reserve Board decided to hike the federal funds rate by 75 basis points, the meeting participants announced their forecasts for economic growth, unemployment and inflation for the next few years and into the longer term. These forecasts tend to help market participants understand the Fed’s future course of policy. But they should also be looked at with a dose of skepticism; the Fed’s projections are as much a product of econometric models as they are an attempt for the Fed to guide the markets (and the economy) in a direction that they want, often regardless of the economic realities.
The Board’s forecasts for their preferred measure of inflation (Core PCE) seemed especially optimistic and is at odds with market expectations, showing that inflation will likely come below 3 percent by 2023 - a projection that is only marginally higher than their forecast from last March. This forecast gives the Bank room to project their “Goldilocks” scenario: slightly slowing growth, small increases in unemployment, lowering inflation and higher real wages - all while avoiding a recession. The markets and surveyed economists are generally split on whether this Goldilocks scenario is feasible, and only time will tell.
Summary Of Economic Projections From The Fed Includes Optimistic Assumptions On Inflation
(Source: Federal Reserve )
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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An Optimistic Fed Forecast