Macro Monkey Says
JPow’s Best Guesstimates
Warren Buffett told us to “beware of geeks bearing formulas.” Well, forecasting requires quite a lot of formulas, and the Federal Reserve, JPow especially, are the biggest geeks in America.
Naturally, then, when the Fed comes out with its latest economic forecasts like it did last week, we have to talk about it.
The Fed has a long history of forecasting. As you likely would’ve guessed, their track record with these forecasts is embarrassingly bad and arguably enough to question why they even do them. I mean, remember the whole “inflation is transitory” thing or JPow saying, “we’re not gonna hike by 75bps.”? Yeah, exactly.
Much of the value in reading a forecast comes not from the actual numbers being projected but from the glimpse into the psychology of the forecaster. Given that the forecaster here is the most powerful economic institution to ever lurk around this planet, it’s probably worth paying attention to at least a little bit.
Basically, the Fed’s quarterly updates to their economic forecasts focus on three key topics: GDP, Unemployment, and, of course, Inflation. Members of the FOMC all give their takes on these readings for the next 3 years and into the “longer run,” all tied up in a cute, little, chart-filled, 17-page report. Let’s check it out.
Gross Domestic Product
Trying to forecast gross domestic product for this +$23tn ship we call the economy is itself just that, gross. But, nevertheless, JPow presses on.
FOMC members currently have 2023 full-year GDP growth in a range of -0.2% to 1.3%, a narrowing of the range when compared to December’s -0.6% to 1.1%.
Despite the narrowing range, the confidence in these forecasts seems to have shrunk as the modal projections flattened. Altogether, this could suggest that now that we are almost a full quarter through the year, FOMC members are more confident that GDP growth will be positive but less confident about the level of that growth.
However, like in December, risks remain heavily weighted to the downside, meaning that the FOMC sees a far higher chance of negative shocks impacting their forecasts than positive ones.
Looking forward, GDP growth is expected to normalize around a 1% - 1.5% level in 2024, with one FOMC member still foreseeing a contraction of around -0.2%. 2025 is when we start to normalize back to that ~1.8% level our economy is used to.
Unemployment
Nobody tell Elizabeth Warren, but the Fed’s forecasts for unemployment are not ideal.
The 3.6% unemployment we have now is incredibly low and symptomatic of an economy growing above potential, aka “too fast.” The one clear projection in this report comes around this topic, as not a single FOMC member sees unemployment staying that low - or even below 3.8%, for that matter - by the end of 2023.
Basically, there are waves seen in unemployment numbers going forward. Most participants expect 2023 to end in the range of 4.4% - 4.7% unemployed, with 2024 figures creeping up to 4.5% to 5% and one member projecting as high as 5.3%.
2025 and the longer run, however, are (of course) anticipated to see unemployment back in a comfy neighborhood of high 3% to low 4% range. To get there, somewhere in the range of 800k, 1.7mn Americans need to lose their jobs. Anyone wanna volunteer to go first?
Inflation
Requiring unemployment to rise that much in order to heal the economy might seem strange, but I think this guy might have something to say here.
The FOMC splits inflation projections into PCE and Core PCE, Directionally, they move together, but comparing projections of each over the same period can give us a little extra flavor.
Much more confidence is seen in the Core projections, apparently, as estimates sit in a far narrower range, with FOMC members clustering their guesstimates more. 3.5%-3.6% is the magic number for Core by 2023’s end, while regular PCE inflation estimates span a range from 2.7%-4.2%, a clear indication that the FOMC has no clue what could happen.
In the longer run, inflationary pressures are almost universally expected to abate by late 2024 and/or early 2025, back to that beloved 1.8%-2% range.
Conclusion
Remember when we said forecasting tells you more about the forecaster than the topic they’re forecasting? Well, this is a prime example. The one thing we can learn here is that the Fed is also dripping with uncertainty around the macro environment’s short-term future.
But, appearing confident in the projections they give is a key part of the Fed’s quarterly updates. If the Fed can show the market that they at least think they know what is happening, this should, in theory, lower the degree of uncertainty plaguing asset prices.
TLDR: No one knows what’s going on, but the Fed wants to think that you think that they think they know what they’re doing. Nice and easy, right?
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