Tuesday, November 22, 2022
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How to Read the Fed’s Projections Like a Pro

In the Fed’s last set of projections, officials saw unemployment rising to 4.1 percent in 2024. (September is the first set of projections that will include 2025.) That was above the current 3.7 percent unemployment rate and higher than the 4 percent unemployment rate the Fed saw as sustainable over the longer run.

“These are the unfortunate costs of reducing inflation,” Mr. Powell said late last month. “But a failure to restore price stability would mean far greater pain.”

The road toward higher unemployment is paved with slower growth. To force the job market to cool and inflation to moderate, Fed officials believe they have to drag economic growth below its potential level — and how much it is expected to drop can send a signal about how punishing the Fed thinks its policies will be.

Many experts think that the economy is capable of a certain level of growth in any given year, based on fundamental characteristics like the age of its population and productivity of its companies. Right now, the Fed estimates that longer-run sustainable level as about 1.8 percent, after adjusting for inflation.

Last year, the economy was growing much more strongly than that — it began overheating. Now, to bring inflation down, it needs to slow below that rate for some time, the logic goes. As of their latest projections, officials saw growth at 1.7 percent this year and next. If they show a bigger down-drift this time, it will be a signal that they think a more aggressive hit to the economy will be needed to wrestle inflation lower.

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

That’s because the Fed’s forecasts predict how the economy will shape up if central bankers set what they consider to be “appropriate” monetary policy. To qualify as “appropriate,” monetary policy by definition must push price increases back toward the Fed’s 2 percent annual average goal over the course of a few years. That means Fed inflation forecasts always converge back toward the central bank’s goal in economic estimates.

If there is a glimmer of utility here, it is how long the central bank sees it taking to wrestle prices back to its target level. In June, for instance, officials didn’t see it happening through 2024, signaling that the path toward more subdued inflation is likely to be a long one.

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