Monetary Policy Report 2022: Key Findings and Future Projections
The FED sees lower interest rates and a strong fourth quarter in their report.
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High Level Overview of the Monetary Policy Report
The US economy is showing signs of weakness in various sectors, including the labor market, which has experienced tight conditions and disparities in employment levels, despite strong demand for labor and rising wages.
Fiscal policies and state and local government finances have been impacted by the pandemic, with the deficit falling and the federal debt held by the public rising due to fiscal support.
Europe's GDP growth slowed down in the second half of the year due to high energy prices and weak global demand, but recent indicators suggest a recovery has started.
The Federal Reserve is monitoring inflation developments closely and will adjust its monetary policy as appropriate to achieve its longer-run goals of maximum employment and price stability.
FOMC projections show that most participants expect the federal funds rate to be between 2.25% and 3.25% by the end of the year, with real GDP expected to grow at a moderate pace and inflation remaining near the FOMC's target of 2%.
20 Bullish Cases for A Bright Beautiful Economy
The labor market remains extremely tight with robust job gains, averaging 380,000 per month since the middle of last year.
**The strong job gains reflect a robust labor market and suggest a healthy economy.
Real GDP growth picked up in the second half of 2022.
**Real GDP growth picking up indicates economic growth and expansion.
Measures of longer-term inflation expectations remain within the range of values seen in the decade before the pandemic.
**Long-term inflation expectations remaining within pre-pandemic levels suggest confidence in the economy's stability.
The Federal Reserve has continued the process of significantly reducing its holdings of Treasury and agency securities in a predictable manner.
**The predictable reduction of Treasury and agency securities by the Federal Reserve demonstrates responsible and calculated monetary policy decisions.
Price increases for goods outside of food and energy slowed considerably in the latter part of 2022.
**The slowing of price increases for goods outside of food and energy indicates improved supply chain issues and capacity constraints, which should help to stabilize prices in the long run.
Strong labor demand and wage growth, especially for least advantaged groups
**Strong labor demand and wage growth, especially for least advantaged groups: As labor market conditions have tightened, wage growth has risen sharply, especially for the least advantaged groups.
Labor shortages due to persistent drop in labor force participation rate below pre-pandemic levels
**Labor shortages due to persistent drop in labor force participation rate below pre-pandemic levels: The labor force participation rate dropped sharply at the onset of the pandemic and has remained persistently below pre-pandemic levels ever since then. This has contributed to a widening gap between labor demand and labor supply and to widespread labor shortages.
Total available jobs exceed the number of available workers
**Total available jobs exceed the number of available workers: The number of total available jobs measured by total employment plus posted job openings continues to far exceed the number of available workers measured by the size of the labor force. The share of workers quitting jobs each month, an indicator of the availability of attractive job prospects, remains high.
Business investment and capital spending plans holding up
**Business investment and capital spending plans hold up: While business sentiment has declined significantly and financial conditions have tightened, survey indicators of capital spending plans have continued to hold up.
Loan performance remains strong, credit availability broadly in line with pre-pandemic levels
**Loan performance remains strong, credit availability broadly in line with pre-pandemic levels: Loan performance remains strong, and credit availability is broadly in line with pre-pandemic levels, despite slight tightening in credit supply and notable rise in interest rates on small business loans.
Federal deficit falling and state and local government payrolls regaining pandemic losses
**Federal deficit falling and state and local government payrolls regaining pandemic losses: With pandemic-related fiscal support fading and receipts on the rise, the federal deficit fell to 5.5 percent of GDP in 2022. State and local government payrolls have regained approximately three fourths of their sizable pandemic losses, and real infrastructure spending by these governments is 10 percent below pre-pandemic levels.
Equity prices increased moderately despite a weakened economic outlook
**Despite a weakened economic outlook, equity prices increased moderately, indicating that investors remain optimistic about the future prospects of companies.
Spreads on corporate bonds declined moderately and remain in line with historical median
**Declining spreads on corporate bonds suggest that investors are more confident about the creditworthiness of companies, which could lead to increased investment and economic growth.
Delinquency rates on bank loans remained low in Q4 2022
**Low delinquency rates on bank loans indicate that borrowers are able to repay their debts, which could support economic growth by increasing the availability of credit.
Economic indicators suggest a recovery in China and Europe's economic activity is proving more resilient than expected
**Increasing foreign equity indexes suggest that investors are optimistic about the global economy and could increase investment.
Foreign equity indexes increased across major economies
**Increasing foreign equity indexes suggest that investors are optimistic about the global economy and could increase investment.
The Federal Reserve has continued to implement its plan for significantly reducing the size of its balance sheet
**The Federal Reserve's continued implementation of its plan to reduce the size of its balance sheet could help maintain the stability of the financial system and prevent inflation.
The Federal Reserve System had an estimated consolidated net income of about 58 billion over 2022
**The Federal Reserve's estimated consolidated net income indicates that the central bank is financially healthy and could continue to support economic growth.
Simple policy rules show a highly accommodative stance of monetary policy
**The highly accommodative stance of monetary policy suggested by simple policy rules could stimulate economic growth by encouraging borrowing and investment.
Real Gross Domestic Product (GDP) is projected to increase from the previous year to the indicated year. An increase in real GDP is a positive sign for growth.
**The confidence interval around the median projected values is assumed to be symmetric and based on root mean squared errors of various private and government forecasts made over the previous 20 years. This provides a degree of reliability to the projections.
TL;DR the Final Conclusion of the Report
The Monetary Policy Report provides a comprehensive overview of the current state of the US and global economy.
While there are signs of weakness in some sectors, such as the labor market, there are also positive indicators, such as strong job gains, real GDP growth, and moderate inflation.
The Federal Reserve remains committed to adjusting its monetary policy as appropriate to achieve maximum employment and price stability.
Additionally, the 20 bullish cases for a bright, beautiful economy provide optimism for the future, highlighting strong labor demand, wage growth, business investment, and credit availability.
While challenges remain, these indicators suggest a positive outlook for the economy in the coming year.
Notice of Source of Data Collection
The material released after the Federal Open Market Committee's meeting on December 13-14, 2022, includes economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, indicating a change in real gross domestic product (GDP), unemployment rate, and measures of inflation.
These projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather participants' individual assessments of appropriate monetary policy.
The confidence interval around the median projected values is assumed to be symmetrical and based on root mean squared errors of various private and government forecasts made over the previous 20 years.
The current assessments are summarized in the lower panels, and the projections include risks to core PCE inflation and a diffusion index of participants' uncertainty assessments.
The full original report can be found here https://www.federalreserve.gov/monetarypolicy/files/20230303_mprfullreport.pdf