The latest projection from the Federal Reserve suggest a tightening cycle in the U.S. should kick off by the start of 2012, according to Societe Generale economist Aneta Markowska.
The Fed cut its GDP projections slightly, raised its inflation expectations, and suggested the unemployment situation was improving in its latest report.
utilising the Taylor Rule, a formula designed to compute what the Fed’s interest rate should be as a result of certain inflation, growth, and output variables, Markowska believes we should see a rate hike in early 2012.
From Aneta Markowska:
The new forecasts saw unemployment revised down on the back of incoming data. The more interesting revision was to core inflation for end-of 2011 which was taken up by 0.3% to 1.3% – 1.6%. Putting the Fed’s new forecasts through a standard Taylor rule puts the neutral fed funds rate at 0.23% for end of 2011 and 1.18% at end of 2012. Previous forecasts implied -0.6% and +0.6% respectively. While the new forecasts imply an earlier tightening, the tone certainly does not.
So the Fed may be saying one thing, and projecting another. These latest projections could fall short, and that could keep the Fed from raising rates. Further, dovish members of the FOMC may find other excuses to delay a rate hike, like the situation in Europe and Japan.
Photo: Societe Generale