To The Moon

The Fed’s Summary of Economic Projections (SEP) sheds light on the central bank’s expectations for economic growth, inflation, employment, and interest rates.

In this article, I would like to share what is SEP, how significance is it?, how it is being used by the Fed and market participants and its limitations.

What is the Summary of Economic Projections (SEP)?

The Summary of Economic Projections is a quarterly report published by the Federal Reserve, which is available on their website as a PDF document. It compiles the economic forecasts of the members of the Federal Open Market Committee (FOMC), the panel responsible for setting U.S. monetary policy.

The SEP includes projections for key economic indicators such as GDP growth, unemployment rate, inflation, and the expected path of the federal funds rate over the next few years and in the longer run.

In more details, the SEP specifically includes these following variables projections.

Real gross domestic product (GDP) growth

The FOMC participants’ projections for real GDP growth for the current year, the next two years, and the longer run.

The unemployment rate

The FOMC participants’ projections for the unemployment rate for the current year, the next two years, and the longer run.

Inflation

The FOMC participants’ projections for inflation, as measured by the personal consumption expenditures (PCE) price index, for the current year, the next two years, and the longer run.

Federal Funds Rate

The FOMC participants’ projections for the federal funds rate, which is the interest rate at which banks lend to each other overnight, for the current year, the next two years, and the longer run. This is also popularly known as the “Fed Dot Plot.”

There is something we need to understand, each FOMC members will assess the appropriate monetary policy to achieve the Fed’s dual mandate: maximum employment and stable prices so as to work out their projections.

There is also a discussion of the risks and uncertainties surrounding the economic projections that is normally included in the SEP. FOMC participants would consider a wide range of factors (like geopolitical events, global economic conditions, and fiscal policy) when they make their projections.

The SEP is a critical tool for communicating the Fed’s economic outlook to the public as it provides a comprehensive picture of the committee’s views.

Why Summary of Economic Projections (SEP) Is Important?

There are several reasons why the SEP is an important document. Here are 4 reasons and summary.

Policy Guidance

Market is usually concerned on how Fed officials anticipate economic conditions to evolve, influencing their approach to monetary policy. The SEP offers us the insights.

Market Impact

The SEP is used to gauge future policy changes, which can affect investment decisions and interest rates on debt. Financial markets would closely analyze the SEP report in order to get a better understanding for their investment decisions and interest rates on debt.

Public Understanding

The SEP report will provide the public an avenue to understand the economic outlook and the reasoning behind the Fed’s policy decisions.

Transparency

The SEP reflects the Fed’s commitment to transparency, allowing for a deeper understanding of its policy decisions.

How The Federal Reserve Use The SEP

Policy Decision-Making

FOMC members use the SEP as a basis for discussion and decision-making regarding interest rates and other policy measures.

Assessment Tool

The SEP helps the Fed assess risks to the economic outlook and plan accordingly.

How The Market Participants Use The SEP

Forecasting Tool

Investors, traders, economists, and analysts use the SEP to anticipate future economic conditions and the direction of monetary policy. Traders will scrutinize these forecasts for any clues on potential acceleration in the Fed’s tightening path. Any further upward revision to projected rates or downgrades to economic or inflation projections could bolster expectations for more aggressive (hawkish or dovish) policy action.

Benchmarking

The SEP serves as a benchmark for comparing actual economic outcomes with the Fed’s expectations.

Limitations of the SEP

While the SEP is a valuable resource, it’s important to be aware of its limitations:

Projection, Not Prediction

The SEP is based on projections, which are inherently uncertain. Economic conditions can change rapidly, making these projections subject to revision.

Diversity of Views

The SEP represents a range of views from different FOMC members, NOT a consensus forecast.

External Factors

Unforeseen events or shocks to the economy can significantly alter the outlook, rendering the SEP’s projections outdated.

Latest Summary of Economic Projections (SEP) From Fed

As we can see that the latest FOMC summary of economic projections for the Fed Funds rate, is showing that we are look at rate cuts beyond 2024.

We might not reach target 2% inflation, but we should be very close by the end of 2024 with 4 rate cuts. You may look at my previous article for my model prediction.

Fed Funds Rate Prediction For 2024 Correlate To Summary of Economic Projections (SEP)

Summary

While SEP is a helpful tool, but the interpretation is also important, and we should always be aware that there are other factors and reports that we need to look at to consider a more comprehensive approach.

Appreciate if you could share your thoughts in the comment section whether you think understanding SEP is helpful to investors to sense how the market might be moving in views of the Fed policies?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.