The Fed forecasts shown in the chart above reflect an average of the Fed forecast ranges for the last three forecasts. The official Fed forecast tables give an upper and lower range for the forecasts. The chart shows the forecasts using the average of the upper and lower range values for each indicator. It is a "central tendency" forecast in that the Fed discards the lowest and highest forecast for each indicator made by an FOMC participant. The Fed forecasts are anonymous and are a summary of forecasts prepared individually by each governor on the Federal Reserve Board and each regional Fed president.

 

In December, growth forecasts for 2016, 2017, and 2018 were little changed. The recovery is projected to remain moderate relative to historic averages. Real GDP growth is forecast to be between 2.3 and 2.5 percent in 2016, between 2.0 and 2.3 percent in 2017, and between 1.8 and 2.2 percent in 2018. The unemployment rate is expected to fall from 5.0 percent in 2015 to between 4.6 and 4.8 percent in both 2016 and 2017 and to 4.6 to 5.0 percent in 2018. Forecasts for headline PCE inflation point toward the Fed's 2 percent target, starting at 0.4 percent for 2015 before moving to 1.2 to 1.7 percent in 2016, 1.8 to 2.0 percent in 2017 and finally to 1.9 to 2.0 percent in 2018. Core inflation, starting at 1.3 percent in 2015, is seen rising to 1.5 to 1.7 percent in 2016, to 1.7 to 2.0 percent in 2017 and then moving to target at 1.9 to 2.0 percent by 2018.

 

Many in the Fed have indicated in recent years that they see the benefits of inflation targeting. The argument has been that if the public knows what the target is and believes the Fed will maintain inflation within the target in the long run, then inflation expectations are more firmly anchored. The Fed actually held an unannounced FOMC conference call in January 2009 to discuss issues associated with establishing an explicit numerical objective for inflation. No numerical targets were established but the end result of the call was that committee members would submit their views on the long-term forecast for real GDP, the unemployment rate, and PCE inflation.

 

In recent years, longer run forecasts included an unofficial inflation target until the January 2012 FOMC meeting when the Fed specifically announced a long-term "inflation goal" of 2 percent.  Ben Bernanke, then chair, noted at the time that the Fed has a dual mandate from Congress and that unemployment and inflation get equal weight when making policy decisions. It was at this meeting that the Fed for the first time released its projections for the fed funds rate and timing for when the next rate move is expected. The forecast charts only show point forecasts for the end of the year by individual FOMC participants.

 

With the September 2014 forecasts, the Fed switched to a somewhat different set of numbers for policy rate forecasts. The Fed now focuses on a fed funds rate range and the forecasts now reflect FOMC participants' views of the mid-point of an appropriate range. The forecast for the rate at the end of 2017 from the December FOMC was between 1.9 and 3.0 percent with the median at 2.4 percent, slightly lower than the September FOMC projections. FOMC participants generally see about 3.25 percent to 4.25 percent as the appropriate long-run fed funds rate. Regarding the timing of future rate hikes, the Fed is data-dependent on a meeting-by-meeting basis. Specifically, policy makers will raise the fed fund rate when they see further improvement in the labor market and are further confident that inflation will begin approaching their 2 percent target. All forecasts are affected not just by changing views of the economy but also by annual rotation in January of voting District Bank presidents. Views may differ in terms of relative hawkishness or dovishness.