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FOMC Projections Improve, Dovish Rate Forecasts Slowly Losing Wings

e21 | May 7, 2012

The most recent FOMC meeting kept interest rates at near-zero levels for the fortieth straight month. Despite holding rates steady, members did show a changing outlook regarding the US economy in the second installment of the Fed’s publicly released forecasts. Forecasts for unemployment improved slightly as the Fed now expects the overall rate to drop to 8.0% by year-end. Inflation pressures have increased with the rise in gasoline prices. The Fed sees inflation between 1.9% and 2%, consistent with its target, but higher than its previous forecast of 1.4% to 1.8% in January. Growth expectations for 2012 climbed to between 2.4% and 2.9%, up from 2.2% to 2.7%. However, the growth forecasts for 2013 and 2014 were lowered in part because of the prospect of tax increases.

The outlook on growth, inflation, and unemployment showed subtle changes since January, so too did interest rate projections. The first chart below (from the WSJ) shows projections from April. The chart that follows it is from the FOMC’s January forecast. While there are no drastic changes it does appear FOMC members are slowly losing their dovish feathers.