Wednesday, July 6, 2016

The "new characterization" forecast

From the "new characterization" PDF from James Bullard at the St. Louis Fed:
The upshot is that the new approach delivers a very simple forecast of U.S. macroeconomic outcomes over the next 2½ years. Over this horizon, the forecast is for real output growth of 2 percent, an unemployment rate of 4.7 percent, and trimmed-mean PCE inflation of 2 percent. In light of this new approach and the associated forecast, the appropriate regime-dependent policy rate path is 63 basis points over the forecast horizon.

The PDF is dated 17 June 2016. Let's say the "next 2½ years" includes the second half of 2016 plus all of 2017 and 2018. The "new characterization" predicts real growth, unemployment, and inflation thru the end of 2018.

A footnote on "trimmed-mean PCE inflation" reads

We will refer to inflation as measured by the 12-month Dallas Fed trimmed-mean inflation rate throughout this memo as we think it is the best indicator of inflation trends. The most current reading is 1.84 percent.


By "the 12-month ... inflation rate" I'm thinking they mean what FRED calls "Percent Change from Year Ago" (as opposed to the "Percent Change at Annual Rate" or the "6-Month Annualized Percent Change").

Yeah. The current vintage is dated 2016-06-29. The most recent previous vintage is dated 2016-05-31. The most recent value of this earlier vintage, for April 2016, is 1.84. Same as the reading in the footnote:

Graph #1: Seeing if I have the right data. Yup.
To be annoyingly fastidious, the "Percent Change at Annual Rate" series shows the value 2.48 for April 2016 in the May vintage. And the "6-Month Annualized" shows the value 1.91 for April, in the May vintage. The "Percent Change from Year Ago" series -- FRED's PCETRIM12M159SFRBDAL -- is definitely the one they used for the "new characterization" PDF.


So here in red is the inflation forecast -- 2.0 percent annual from July 2016 to the end of 2018:

Graph #2: The Inflation Rate (blue) and the Inflation Forecast (red)
Oh, I want to say it looks like the blue line is going to crash thru the red line some time in mid-2017,

about a year from now, before even the mid-point of the forecast period. But who knows.

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