FED QUARTERLY PROJECTIONS UPS GROWTH AND PCE INFLATION
Along with the Fed policy statement on March 20, 2024, the Fed also updated its quarterly projections of key macros. The Federal Open Markets Committee (FOMC) gives a quarterly update of key projected macros like GDP growth, core PCE inflation, headline PCE inflation and unemployment. In addition, it also provides the guidance on how the Fed rates would pan out in the next few years. The big change in March 2024 update was that we now have full year data for calendar 2023 and projections for 2024, 2025 and 2026; apart from the long range sustainable projections. There were 3 trends visible in the latest macro update.
The first change is obvious. The FOMC has upped the GDP growth estimate for FY24 to 2.1% now, after calendar 2023 GDP growth came in sharply higher at 3.1%. GDP growth is now likely to be 2% or higher till calendar 2026. Secondly, the Fed has upped the core PCE inflation projections by 20 bps for calendar 2024. That is likely on the back of the shipping crisis globally, which could disrupt supply chains in 2024. Long term PCE inflation remains static. Finally, the rate cuts are still on, but the Fed has toned down its projections on rate cuts. The Fed will move in a more calibrated fashion on rate cuts.
US MACRO STORY FOR LAST 5 CALENDAR YEARS
Here is a quick recap of the data points of the last 5 years. These are actuals and based on actual data flows. It has been updated for actual 2023 data also.
Variable | CY-2019 | CY-2020 | CY-2021 | CY-2022 | CY-2023 |
Real GDP Growth | 3.2% | -1.1% | 5.4% | 0.7% | 3.1% |
Unemployment Rate | 3.6% | 6.7% | 4.2% | 3.6% | 3.8% |
PCE Inflation | 1.4% | 1.2% | 5.9% | 5.9% | 2.8% |
Core PCE Inflation | 1.5% | 1.4% | 4.9% | 5.1% | 3.2% |
Data Source: US Federal Reserve (CY refers to calendar year)
What do we read from the table of historic variables. Let us start with the real GDP first. GDP had been consistently over 3% till 2019. After 3 years of tumult and volatility, year 2023 was the first occasion when full-year GDP growth crossed 3% once again. We are ignoring the 2021 growth, as it was on an artificially low base of the COVID period. Unemployment rates fell from a high of 6.7% in CY2020 to 3.8% in CY2023. This is at par with pre-COVID years and close to the definition of full employment at 3.5%. The low employment ratio is on the back of demand for workers sharply higher than supply. On the inflation front, higher rates is having an impact. After averaging 5.9% in 2021 and 2022, the headline PCE inflation has more than halved to 2.8% in calendar 2023.
RECAP – DECEMBER 2023 FOMC PROJECTIONS (VERSUS SEPTEMBER 2023)
Typically, the Fed projections undergo updates every 3 months. Let us first do a quick recap of how the December 2023 FOMC projections of various macro variables changed over the previous September 2023 quarter. This will form the basis for the latest update of March 2024. With CY2023 actual data now out, the projections are focused on CY2024, CY2025 and CY2026. In addition, the long term sustainable projection for each variable has also been updated. Here are the December 2023 versus September 2023 projections.
Variable | CY-2024 | CY-2025 | CY-2026 | Longer run |
Change in real GDP (Dec-23) | 1.40 | 1.80 | 1.90 | 1.80 |
September projection | 1.50 | 1.80 | 1.80 | 1.80 |
Unemployment rate (Dec -23) | 4.10 | 4.10 | 4.10 | 4.10 |
September projection | 4.10 | 4.10 | 4.00 | 4.00 |
PCE inflation (Dec -23) | 2.40 | 2.10 | 2.00 | 2.00 |
September projection | 2.50 | 2.20 | 2.00 | 2.00 |
Core PCE inflation (Dec -23) | 2.40 | 2.20 | 2.00 | |
September projection | 2.60 | 2.30 | 2.00 | |
Federal funds rate (Dec -23) | 4.60 | 3.60 | 2.90 | 2.50 |
September projection | 5.10 | 3.90 | 2.90 | 2.50 |
Data Source: US Federal Reserve (CY refers to calendar year)
What did we read from the comparison of the FOMC long term projections for the December 2023 quarter versus the September 2023 quarter?
As of December, the Fed was still running with assumption of 75 bps rate cut in 2024 and another 100 bps in 2025. However, the latest data suggests that the rate cuts in 2025 may be lower and there is still ambivalence on when rate cuts will commence in 2024. For now, the debate is a lot more hypothetical, till the time the Fed actually bites the bullet on rate cuts. That may be a good 3-4 months away.
PRESENT DAY – MARCH 2024 FOMC PROJECTIONS (VERSUS DECEMBER 2023)
In the previous segment, we spoke about estimates made by the Federal Open Markets Committee (FOMC) at the time of December Fed statement and compared it to the September projections. Now we have the latest updates for March 2024 and so look at a comparison of the various macro projections as updated in March 2024 compared to December 2023. This is part of the routine quarterly updated and the key changes in outlook are visible in GDP growth, core PCE inflation and unemployment rates.
Variable | CY-2024 | CY-2025 | CY-2026 | Longer run |
Change in real GDP (Mar-24) | 2.10 | 2.00 | 2.00 | 1.80 |
December projection | 1.40 | 1.80 | 1.90 | 1.80 |
Unemployment rate (Mar-24) | 4.00 | 4.10 | 4.00 | 4.10 |
December projection | 4.10 | 4.10 | 4.10 | 4.10 |
PCE inflation (Mar-24) | 2.40 | 2.20 | 2.00 | 2.00 |
December projection | 2.40 | 2.10 | 2.00 | 2.00 |
Core PCE inflation (Mar-24) | 2.60 | 2.20 | 2.00 | |
December projection | 2.40 | 2.20 | 2.00 | |
Federal funds rate (Mar-24) | 4.60 | 3.90 | 3.10 | 2.60 |
December projection | 4.60 | 3.60 | 2.90 | 2.50 |
Data Source: US Federal Reserve (CY refers to calendar year)
Here are some of the key takeaways from the FOMC long term projections for the December quarter, pertaining to the likely guidance on macros for next few years.
Broadly, there are 3 levels of changes that we can decipher from the March 2024 projections of US macros compared to the December 2023 macros. GDP growth is being projected higher, unemployment is being projected lower and core PCE inflation is likely to be the pressure point in CY2024. However, the longer term projections are largely unchanged in the March 2024 update.
HOW WILL RBI INTERPRET FOMC PROJECTIONS UPDATE OF MARCH 2024
There are clear positive takeaways from the macro projections in March 2024. Firstly, the GDP growth projections for 2024 have been sharply upped by 70 bps, but if you consider the 3.1% growth in 2023, then there could be more positive surprises. The unemployment rate has also been lowered. While the unemployment is still off the 3.5% mark, it is not picking up as quickly as originally anticipated. However, the one thing to focus on is the higher than expected core PCE inflation this year. For the RBI, the message is that the Fed would be in no hurry to herald rate cuts and it would still be data driven. For the RBI, the first action point will be after the full budget in July 2024.
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