Macro Analysis

Macro Flash: Reading through the FOMC June 2021 economic projections

The FOMC Meeting convened on June 15-16 surprised the markets with ramped-up expectations for future interest rate hikes expressed by some of the participants to the Meeting. But the accompanying documents released after the meeting include other interesting insights, which help further assess the outlook for monetary policy going forward.

The economic projections made by the participants to the latest FOMC meeting that was held on June 15-16 gives some interesting insights about the outlook for monetary policy in the upcoming quarters. The change of expectations about the timeline for future interest rate hikes was the most salient feature of the meeting that made it to the news headlines. But it is worth digging a bit deeper and reading through the documents accompanying the Meeting. Indeed, these documents contain useful insights about how the FOMC participants view the outlook for the US economy, and what would subsequently be the reaction function of the Monetary institution.

Projections and Risks to GDP, unemployment

Compared with the March projections, the expectations for GDP have been tilted to the upside and the expectations for the unemployment rate have been tilted to the downside. This was broadly expected as the impact of the fiscal and monetary stimulus played strong in H1 2021 and are likely to continue to support the economy in H2 2021 albeit with less potential upside to expect.

It is interesting to note, however, that the participants’ assessments of risk and uncertainty for GDP and the unemployment rate have barely budged compared to the the March projections.

Projections and Risk to inflation

Arguably, the most interesting insights from the FOMC June economic projections are related to inflation. It is easy to see that while the level of uncertainty surrounding inflation has not changed in most participants assessments, the inflation risk assessment is clearly tilted to the upside, both for headline and for core inflation – the latter conveying an even more hawkish message – with inflation now expected to be above the Fed’s 2 percent long run target and consistent with the Fed”s tolerance and implicit objective of letting inflation overshoot for some time before raising its policy rate to curb it – so-called “average inflation targeting” which means the target is averaged over time with periods of inflation below the target and periods of inflation above the target.