Summary of the Federal Reserve’s Economic Projections
Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 9/22/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 9/22/14
Summary of the Federal Reserve’s Economic Projections
Last Wednesday Fed Chair Janet Yellen released the Economic Projections of Fed Board Members and Bank Presidents. This release aggregates the forecasts of GDP, the Unemployment Rate and Inflation and provides interesting insight to the disparity of the individual projections. To summarize this report, below is a table of the central tendency of the forecasts which removes the three highest and lowest projections:
2014 2015 2016 2017 Longer Run Change in Real GDP 2.0 – 2.2% 2.6 – 3.0% 2.6 – 2.9% 2.3 – 2.5% 2.0 – 2.3% Unemploment Rate 5.9 – 6.0% 5.4 – 5.6% 5.1 – 5.4% 4.9 – 5.3% 5.2 – 5.5% PCE Inflation 1.5 – 1.7% 1.6 – 1.9% 1.7 – 2.0% 1.9 – 2.0% 2.0%
What we believe is particularly noteworthy is the latest long run projection for U.S. GDP which ranged between 1.8 – 2.6% with a central tendency as shown above between 2.0 and 2.3%. To put this in perspective, according to Catherine Mulbrandon of Visualizing Economics, between 1871 and 2010 the U.S. economy averaged 3.47%, which, includes multiple business cycles. If we are, as many economists believe, in the midst of a moderate recovery the GDP growth rate begins to look particularly bleak.
Also noteworthy are the inflation projections, the lower end of which run below the Fed’s target for the next three years. With forecasts for inflation running below target for the foreseeable future and the expectation of lackluster economic growth, it comes as no surprise that Yellen kept the “considerable time” language in the policy statement and stressed the data dependency of changes in monetary policy.
The implications that overall economic growth have on the stock market are far reaching and include the effects on investor sentiment, consumer spending, business profitability and the growth rate used to discount equity prices in cash flow models. Investors today are facing a much different economic back drop then they have likely faced in the past and should be careful with both their security selection and asset allocation strategies. Our proprietary models take into consideration the overall economic landscape and are adjusted, as we deem appropriate, as there are changes in market and business cycles – even as these cycles are redefined by the economic data that accompanies them.
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