Whole Lotta Thinkin’ Going On Jim Reber ICBA Securities Ihope the readers of this column will excuse the lack of decorum in the title, but in reading and listening to the words of the Federal Reserve Board’s members over the past month, I hear a lot of hedging. And far be it from me to second-guess the respective governors and regional presidents of our central bank. If they were asked individually for their druthers, I suspect they’d prefer an economic, fiscal and geopolitical backdrop that had less drama. Not to mention an inflation track that would get back to its elusive 2% target. Alas, such doesn’t seem to be the near-term expectations of the Fed. We were shown their most recent projections for the key indicators in the quarterly Summary of Economic Projections (SEP), released on June 18. Several closely watched metrics, such as inflation and gross domestic product (GDP), had significant revisions from the previous quarter. The notorious “dot plot,” in which the 19 members are obliged to place a marker on a grid that corresponds with their guess as to where the fed funds rate will be in one, two, three years and beyond, reflects a wide dispersion of thought. Quarterly Reset First, let’s examine how the Fed’s outlook on inflation has changed. A year ago, the SEP was projecting the preferred inflation gauge, core personal consumption expenditures (PCE), to end 2025 at 2.3%. It is not exactly to the Fed’s liking, but it is noticeably lower than current readings. Fast forward to March 2025, and the estimate had risen to 2.8% as price increases had proven more durable than hoped (and were the major reasons for monetary policy to remain “restrictive”). The June 2025 SEP hiked the year-end 2025 estimate all the way to 3.1%, citing import taxes as the culprit. GDP is directly affected by inflation in that it’s reported as a “real” number, i.e., net of price changes. Accordingly, the current full-year 2025 GDP estimate is now 1.4%, which is down from the 1.7% projected a quarter earlier. That decline is a mirror image of the expected increase in core PCE. Another corollary of inflation is consumer confidence. Like GDP, there is an inverse relationship between expected price hikes and consumers’ expectations. Higher prices equate to lower purchasing power in the short run, which Fed’s Forward Guidance Reflects Uncertainty Endorsed Vendor 20 | The Show-Me Banker Magazine
RkJQdWJsaXNoZXIy ODQxMjUw