Fed Officials See More Upside Than Downside in Risks to Outlook

  • Four officials see inflation risk to the upside, 12 balanced
  • Views shown in data appendix to March FOMC meeting minutes

Some Federal Reserve policy makers are thinking about something that hasn’t occurred to them in a long time: the risk that economic activity exceeds their forecasts now seems to outweigh the risk that it doesn’t.

That’s the message from an appendix to the records of their March 14-15 meeting, published Wednesday in Washington. While a firm majority of the central bank’s 17-member Federal Open Market Committee continues to view risks as “broadly balanced,” the total number of officials who see a chance of better-than-forecast outcomes for employment and inflation rose to the most since the Fed began publishing the assessments with the January 2012 meeting.

Four officials viewed the risks to inflation as weighted to the upside, up from three in December, while 12 saw it as roughly balanced, and one who saw the risks weighted to the downside. The numbers were similar for risks to gross domestic product expansion, which were unchanged from December’s projections. For the unemployment rate, four policy makers saw risks that the measure would be lower than anticipated, up from three in December; 13 saw risks as balanced.

The shift explains why policy makers have been confident about adopting a faster pace of rate increases this year than in 2016, and suggests some officials may be comfortable with considering changing language in the statement the FOMC releases after each of its eight meetings per year. The March statement said “near-term risks to the economic outlook appear roughly balanced.” The FOMC next gathers May 2-3.

The FOMC’s description of how it sees the balance of risks in its post-meeting statements has been watched closely over the last two years for signals about upcoming policy shifts as the committee has embarked on its first tightening cycle in nearly a decade.

In December 2015, when the FOMC voted in favor of its first rate hike of the cycle, it described risks as “balanced,” after calling them “nearly balanced” in the previous 14 statements. The committee dropped the language altogether at its next meeting six weeks later amid financial-market turmoil. It resumed describing risks as “roughly balanced” in September 2016 and has continued to do so at subsequent meetings.

Rate Increase

In March, the committee voted to raise rates by a quarter-percentage point for a third time in this cycle, following increases after their December 2015 and December 2016 meetings, and the median participant projected it would be appropriate to hike them twice more this year.

So far, officials appear to be on track to meet that projection. Investors give them better-than-even odds of doing so, according to the prices of federal funds futures contracts.

The March projections showed the median FOMC participant expected the economy to grow 2.1 percent this year after adjusting for inflation, the unemployment rate to fall to 4.5 percent, and so-called core inflation, based on the prices of personal consumption expenditures excluding food and energy components, to accelerate to 1.9 percent.

Economic growth may have been about 2.1 percent in the first three months of 2017, according to the average of forecasts produced by the New York and Atlanta Fed banks. The unemployment rate fell to 4.7 percent in February, according to the U.S. Department of Labor, and core inflation was 1.8 percent.

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