How to Read the Fed’s Projections Like a Pro

In the Fed’s latest forecasts, officials saw unemployment rise to 4.1 percent in 2024. (September is the first forecast, which will include 2025.) That was above the current jobless rate of 3.7 percent and higher than the jobless rate of 4 percent The Fed saw this as sustainable in the long term.

“That’s the unfortunate cost of fighting inflation,” Mr Powell said late last month. “But a failure to restore price stability would mean far greater pain.”

The road to higher unemployment is paved with slower growth. In order for the job market to cool and inflation to be moderate, Fed officials believe they need to push economic growth below potential levels — and how much it’s projected to fall may signal how tight the Fed is on its policy stance.

Many experts believe that the economy can achieve some growth each year based on fundamental characteristics such as population age and business productivity. The Fed currently estimates that longer-term sustainable level at about 1.8 percent adjusted for inflation.

Last year the economy grew much faster – it started to overheat. Well, in order to bring inflation down, it has to slow below that rate for some time, the logic goes. According to their latest forecasts, officials saw growth of 1.7 percent this year and next. If they show more downward movement this time, it will be a signal that they believe a more aggressive hit to the economy will be required to drive inflation lower.

The inflation estimates in the Fed’s projections are usually not very revealing.

Because the Fed’s forecasts predict how the economy will develop if central bankers set what they consider “appropriate” monetary policy. By definition, to be considered “reasonable,” monetary policy needs to drive rate hikes back toward the Fed’s 2 percent average annual target over a number of years. This means that the Fed’s inflation forecasts consistently converge on the central bank’s target in economic estimates.

If there’s a glimmer of utility here, it’s the time it takes for the central bank to bring prices back to their target levels. In June, for example, officials didn’t see that through 2024, signaling that the road to more subdued inflation is likely to be a long one.

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