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posted on 23 April 2016

FOMCs Summary Of Economic Projections

from the Kansas Fed

---- this post authored by George A. Kahn and Andrew Palmer

In 2012, the Federal Open Market Committee (FOMC) added the federal funds rate to its quarterly Summary of Economic Projections (SEP). As a result, in addition to providing their individual projections of inflation, unemployment, and real GDP growth up to three years into the future, participants in FOMC meetings - including Federal Reserve Board governors and Bank presidents - also began providing their projections of the associated path for the target federal funds rate.

These funds rate projections are not unconditional forecasts but rather reflect each participant's view of "appropriate" monetary policy. Thus, the projections reveal how participants expect the economy to evolve conditioned on their preferred future paths of the federal funds rate. While the federal funds rate remained at its effective lower bound from 2012 to 2015, FOMC participants repeatedly projected the funds rate would rise in conjunction with projected increases in inflation and declines in unemployment.

Although the SEP's various projections of liftoff from the zero lower bound did not materialize, the SEP still provides financial markets and the public valuable information about policymakers' outlook for the economy and their views about appropriate policy. In particular, the SEP can reveal information about Committee participants' policy reaction function. In this article, we use the SEP to evaluate the projected response of monetary policy to expected economic developments, compare this response to past policy actions, and assess why the actual policy path persistently differed from the projected path. We find that the relationship since 2012 between the FOMC's projections of the target funds rate and its projections of inflation and unemployment is data dependent and systematic, meaning the funds rate projections were not on a preset path. Moreover, we find that the relationship is generally consistent with the FOMC's actual policy responses prior to the onset of the zero lower bound. That the funds rate remained stuck at the effective lower bound after 2012 mainly reflects unexpectedly low inflation which was offset to some extent by a faster-than-expected decline in the unemployment rate.

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Source: media/ files/publicat/ econrev/ econrevarchive/ 2016/ 1q16kahnpalmer.pdf

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