Fed’s Evans Put Fiscal Stimulus Into Forecast After Yields Rose

  • Evans: ‘can’t really know’ what Trump policies will look like
  • Chicago forecasts 2017 GDP growth of 2 percent to 2.5 percent

Kaplan: Higher Fed Funds Rate in 2017 Is Appropriate

The Federal Reserve Bank of Chicago added expectations for fiscal stimulus into its forecast for the U.S. economy after market interest rates rose, Chicago Fed President Charles Evans said.

Chicago and the other 11 regional Fed banks submitted their estimates for gross domestic product before participants of the Federal Open Market Committee gathered on Dec. 13-14 for their rate decision. Chicago forecast 2017 GDP growth of 2 percent to 2.5 percent, Evans said, which is in line with the FOMC’s median estimate of a 2.1 percent expansion.

If Chicago hadn’t taken the fiscal stimulus into account, the recent rise in bond yields would have resulted in a lower GDP forecast, he told reporters after participating in a panel discussion.

The episode highlights the difficulty Fed officials face in forecasting the economic impact of President-elect Donald Trump’s pledges to boost spending and cut taxes amid rising bond yields. Fed Chair Janet Yellen in her post-meeting press conference on Dec. 14 said some central bankers -- but not all -- had incorporated assumptions about future fiscal policy into their economic forecasts.

“You can’t really know how to look at any detailed policy proposals at this point,” Evans said. “But the fact that, everything else equal, just the increase in rates would otherwise be restrictive -- I think we wanted to take a more positive viewpoint on that for 2017.”

Click here to see how top forecasters see 2017 shaping up.

Minutes of the December meeting released Wednesday showed that the forecast of Federal Reserve Board staff for growth in the coming years was “slightly higher” in part because of expectations for expansionary fiscal policy. “These effects were substantially counterbalanced by the restraint from the higher assumed paths for longer-term interest rates and the foreign exchange value of the dollar,” according to the minutes.

The yield on 10-year U.S. Treasury notes has risen 0.56 percentage point to 2.42 percent since the Nov. 8 presidential election. The dollar has appreciated 5.7 percent.

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