Oregon Office of Economic Analysis

With the immediate risk of recession appearing to be small — see the WSJ Economic Forecasting Survey at 12 percent and the Philly Fed’s Survey of Professional Forecasters more like 8 percent — much discussion these days focuses on Fed policy. Most economists and financial market types expect the Federal Reserve to begin raising rates in the middle of next year. However as Tim Duy writes, the exact timing probably does not matter as much as the pace of tightening once it begins. Too slow and inflation may take off. Too fast and the economic recovery, even as weak as it has been, could be choked off. Provided the economy continues to improve and even accelerates somewhat, the Fed will need to manage its exit strategy carefully in order to balance these risks. Arguably the most important part here is the not only the continuation of the recovery but acceleration or a pick up in growth, which brings us to our Graph of the Week

The following compares the Fed’s own forecasts for nominal GDP (actually real GDP + PCE) on a 2 year ahead basis. Most forecasters, including the Fed, have performed relatively well on a 1 year ahead basis but keep calling for an improvement “next year” which has largely not materialized at the national level. Some states, such as Oregon, have seen acceleration in job growth but others have decelerated at the same time leaving U.S. growth at consistent rates.So what does this mean for policy and the outlook? Well, the Fed’s not alone here in believing 2015 will be better. About half of the Philly Fed survey and also the Blue Chip forecasters expected 2015 NGDP to be 5 percent or stronger, while the WSJ survey shows 60 percent of respondents think this will occur. Certainly a mild improvement like this is not out of the question, however to the extent that wage growth remains subdued and the economic data does not accelerate, it points more toward a slow pace of tightening, if/once it begins. Of course as economic conditions change, one would expect/hope policymakers react accordingly  — both to the up and downside.