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In a special question in this survey, the Federal Reserve Bank of Philadelphia asked its panelists for their views on inflation targeting. We asked them if they think the FOMC has a numerical target for long-run inflation, which we defined as inflation over the next 10 years, and if so, the measure of inflation that they think the FOMC is targeting and the numerical value of the target. For the question on the measure of inflation targeted, we asked our panelists to choose one measure from a list of four: headline CPI inflation, core CPI inflation, headline inflation in the PCE price index, and inflation in the core PCE price index. We begin this newsletter with a discussion of these results. Our usual discussion of the forecasts follows.
Forty-eight panelists participated in this survey, and nearly all—45—answered the special question. Of the 45 panelists who answered the question, 23 think the FOMC has an inflation target. All 23 agree that the target is for either headline PCE inflation or core PCE inflation. No panelist thinks the FOMC is targeting a CPI-based measure of inflation. Moreover, there is a consensus on whether the target is for headline PCE inflation or core PCE inflation: Of the 23 panelists who think the FOMC is targeting a PCE-based inflation measure, 20 think the target is for core PCE inflation. Three think the target is for the headline measure.
The median estimate (across 20 forecasters) of the core PCE inflation target is 1.63 percent. (The three panelists who think the target is for headline PCE inflation said that the target is 2.00 percent.) How does this estimate compare with the forecasters’ projection for long-run inflation? We conducted a special analysis comparing the 20 panelists’ 10-year annual-average forecasts for headline PCE inflation with their estimates of the core PCE inflation target, also defined over a 10-year horizon. We found that the median estimate for long-run headline PCE inflation is 2.15 percent. Thus, among the group of 20 forecasters who think that the FOMC is targeting core PCE inflation, the median forecast for long-term headline PCE inflation (2.15 percent) exceeds the median estimate of the core PCE inflation target (1.63 percent). An analysis of the individual responses shows that almost all 20 forecasters think actual long-run inflation will exceed their estimate of the FOMC’s inflation target. Indeed, among those who chose a core PCE target, only three have long-run forecasts matching their estimates of the numerical target. (For the three panelists who chose the headline PCE target, all had long-run forecasts matching their numerical target.) In the last part of our special question, we asked the panelists to explain why their long-run forecast for inflation would exceed their estimate of the target for inflation. Many pointed to the effect on actual inflation from supply shocks and the influence of additional goals that the FOMC might have (view individual responses).
The outlook for inflation — over the near term and at longer horizons — is about the same now as it was three months ago, according to the 48 forecasters polled by the Federal Reserve Bank of Philadelphia. The forecasters expect core CPI inflation to average 2.2 percent (fourth quarter over fourth quarter) in each of the next three years. This projection is unchanged from the last survey. Core PCE inflation will average 1.9 percent in each of the next three years. This projection is nearly identical to that of the last survey.
Turning to the long run, headline CPI inflation will average 2.50 percent over the next five years and 2.40 percent over the next 10 years. The five-year estimate is up from 2.45 percent in the last survey, while the 10-year estimate is unchanged (not shown). Headline PCE inflation will average 2.20 percent and 2.10 percent over the same periods, respectively. These estimates are unchanged from the previous survey.
The accompanying figures show the probabilities that the forecasters are assigning to the possibility that fourth-quarter over fourth-quarter core PCE inflation in 2007 (see chart) and 2008 (see chart) will fall into each of 10 ranges. We show the estimates for the current survey and the survey of three months ago. For 2007, the forecasters have raised the probability that inflation will fall in the range of 1.5 percent to 1.9 percent. That estimate now stands at 48 percent, up from 37 percent previously. The probability that inflation will fall in the range of 2.0 to 2.4 percent is now 35 percent, down from 42 percent. For 2008, the forecasters think there is a 72 percent chance that inflation will fall in the combined range of 1.5 percent and 2.4 percent, with the chance split roughly equally between the ranges of 1.5 percent to 1.9 percent and 2.0 to 2.4 percent.
The forecasters are cutting their estimates for growth over the remainder of this year and the first half of 2008. This marks the third survey in which the outlook for growth appears weaker. The largest downward revision (1.2 percentage points) is for the current quarter, when real GDP will grow at an annual rate of just 1.5 percent, down from the previous projection of 2.7 percent. Downward revisions of about 0.5 percentage point characterize the outlook for the first two quarters of 2008, when growth will average 2.2 percent and 2.3 percent, respectively. On an annual-average over annual-average basis, real GDP will grow 2.1 percent in 2007 and 2.5 percent in 2008. Notably, the forecasters have revised downward their estimates for annual growth continually since the survey of 2007 Q1, when they thought growth would be 2.8 percent in 2007 and 3.0 percent in 2008.
Slightly weaker conditions in the labor market accompany the outlook for growth. Projections for the unemployment rate are higher in each quarter of 2008 than they were in the previous survey. On an annual-average basis, unemployment will be 4.6 percent in 2007, unchanged from the previous survey, and 4.9 percent in 2008, up from 4.7 percent previously. Gains in nonfarm payroll employment will average 152,000 jobs per month in 2007 and 104,000 per month in 2008, both down somewhat from the last survey.
The accompanying charts provide some information on the degree of uncertainty the forecasters have about their views on year-over-year growth in real GDP in 2007 (see chart) and 2008 (see chart). Each chart presents, for the current and previous survey, the forecasters’ estimates of the probability that growth will fall into each of six ranges. In 2007, the forecasters think there is a 65 percent chance that year-over-year growth will average between 2.0 and 2.9 percent. Their previous estimate was nearly 50 percent. The chart for 2008 shows the weakness in the current forecast. The forecasters have raised the chance that growth will fall in the combined range of 1.0 to 2.9 percent while cutting the chance that growth will fall into the higher range of 3.0 to 3.9 percent.
A slightly higher risk of a negative quarter accompanies the forecast. The forecasters have revised upward the chance of a quarter of negative growth over the next four quarters. That chance now hovers around 20 percent or more in each quarter of 2008.
The Federal Reserve Bank of Philadelphia thanks the following forecasters for their participation in recent surveys:
Scott Anderson, Wells Fargo and Company; Robert J. Barbera, ITG Inc.; David W. Berson, Fannie Mae; Joseph Carson, Alliance Capital Management; Gary Ciminero, CFA, Rhode Island House Policy Office; Christine Chmura, Ph.D. and Xiaobing Shuai, Ph.D., Chmura Economics & Analytics; Louis Crandall, Wrightson ICAP LLC; Richard DeKaser, National City Corporation; Rajeev Dhawan, Georgia State University; Doug Duncan, Mortgage Bankers Association; Michael R. Englund, Action Economics, LLC; Gerard F. Fuda, Independent Economist; Stephen Gallagher, Societe Generale; James Glassman, JP Morgan Chase & Co.; Global Insight; Jeoff Hall, Thomson Financial; Keith Hembre, First American Funds; William B. Hummer, Wayne Hummer Investments; Saul Hymans, Joan Crary, and Janet Wolfe, RSQE, The University of Michigan; Peter Jaquette, Weyerhaeuser Company; Fred Joutz, Benchmark Forecasts and Research Program on Forecasting, George Washington University; Kurt Karl, Swiss Re; Dr. Irwin Kellner, Hofstra University/MarketWatch/North Fork Bank; Jack Kleinhenz, Kleinhenz & Associates, Inc.; Thomas Lam, UOB Group; L. Douglas Lee, Economics from Washington; Allan R. Leslie, Economic Consultant; Mickey D. Levy, Bank of America; Joseph Liro, Stone & McCarthy Research Associates; John Lonski, Moody’s Investors Service; Macroeconomic Advisers, LLC; Dean Maki, Barclays Capital; Drew Matus, Lehman Brothers; Edward F. McKelvey, Goldman Sachs; Jim Meil, Eaton Corporation; Anthony Metz, Pareto Optimal Economics; Michael Moran, Daiwa Securities America; Joel L. Naroff, Naroff Economic Advisors; Mark Nielson, Ph.D., MacroEcon Global Advisors; Michael P. Niemira, International Council of Shopping Centers; Martin A. Regalia, U.S. Chamber of Commerce; David Resler, Nomura Securities International, Inc.; David Rosenberg, Merrill Lynch; John Ryding, Bear, Stearns, and Company, Inc.; David F. Seiders, National Association of Home Builders; Julian Silk, UMUC; John Silvia, Wachovia Corporation; Allen Sinai, Decision Economics, Inc; Tara M. Sinclair, Research Program on Forecasting, George Washington University; Sean M. Snaith, Ph.D., University of Central Florida; Constantine G. Soras, Ph.D., Verizon Communications; Neal Soss, Credit Suisse; Stephen Stanley, RBS Greenwich Capital; Susan M. Sterne, Economic Analysis Associates, Inc.; Thomas Kevin Swift, American Chemistry Council; Gary Thayer, A.G. Edwards; Lea Tyler, Oxford Economics USA, Inc.; Albert M. Wojnilower; Jay N. Woodworth, Woodworth Holdings, Ltd.; Richard Yamarone, Argus Research Group; Mark Zandi, Economy.com; Ellen Beeson Zentner, Bank of Tokyo-Mitsubishi UFJ, Ltd.
This is a partial list of participants. We also thank those who wish to remain anonymous.
The Philadelphia Fed's Survey of Professional Forecasters was formerly conducted by the American Statistical Association (ASA) and the National Bureau of Economic Research (NBER) and was known as the ASA/NBER survey. The survey, which began in 1968, is conducted each quarter. The Federal Reserve Bank of Philadelphia, in cooperation with the NBER, assumed responsibility for the survey in June 1990.
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