Brent Ciliano, CFA | SVP, Chief Investment Officer April 22, 2016
Six for '16 Check-In
Recently the Federal Reserve ("The Fed") released a Summary of Economic Projections from its March meeting. This summary includes updates to data on interest rates, inflation, growth and unemployment. Below is a summary of The Fed’s updates and revisions that relate to our forecasts that we discussed in our February 23, 2016 Outlook entitled "Six for '16."
U.S. Growth (Real GDP)
The Fed Update: Expected growth for the U.S. was revised lower for both 2016 and 2017. For 2016, growth was reduced from 2.4% annualized growth (December’s forecast) down to 2.2%. For 2017, growth was reduced from 2.2% down to 2.1%.
What We Said: Our global growth target for 2016 is 3.1% vs. the International Monetary Fund (IMF) forecast of 3.4%.1 We estimate that U.S. real GDP for 2016 will be 2.0% vs. the consensus estimate of 2.4%.
Note that The Fed’s reduction gets us halfway to our estimate of 2% real growth in the U.S. for 2016. Given the recent velocity and magnitude of recent not-so-good U.S. economic data (think retail sales, the Institute for Supply Management (ISM) manufacturing/non-manufacturing index, still decelerating corporate profitability and the revision of 2017 real growth) we believe The Fed will reduce this estimate further, ultimately settling at or around 2% for full-year 2016.
The Fed Update: The median of The Fed Official’s forecasts, better known as The Fed’s "Dot Plot" was revised. Their forecast back in December implied 4 interest rate increases in 2016, and a year-end Fed Funds target of 1.38%. The Fed’s revised data now implies only 2 interest rate increases and a year-end target of 0.875% (a range of 0.75% to 1.0%).
What We Said: Given the magnitude and velocity of recent economic data and current market volatility, we do not believe The Fed will increase the rate four times, nor will the rate be 1.375%. Our baseline view is The Fed moves one or two times, with a year-end target of 0.625% to 0.875%. If The Fed honors their "data dependent" statement and markets continue to act as they currently are, we believe there exists the potential of no interest rate hikes at all in 2016.
The Fed Update: The Fed stated that "economic activity has been expanding at a moderate pace" with household spending gaining amid "soft" company investment and net exports. They also stated while inflation has "picked up in recent months," market-based measures of inflation compensation are still low. The Fed maintained their projections on how soon inflation will return to their 2% target, while cutting their inflation forecast to 1.2% this year from 1.6%. Officials still see the preferred price gauge (the Personal Consumption Expenditures (PCE) deflator) rising 1.9% in 2017 and 2% in 2018.
What We Said: Our view is continued weakness in commodity prices, slowing global demand and lower productivity growth continue to put downward pressure on inflation and will keep inflation levels significantly below The Fed’s 2% desired threshold throughout much of 2016. Stabilization in global growth in the second half of 2016 will help, but not enough to reach The Fed’s comfort level.
1IMF estimate, World Economic Update, January 19, 2016.
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