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

Let’s break down what the SEP is, its significance, how it’s 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.

More specifically, the SEP includes projections for the following variables:

  • 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.
  • The 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.”

Each FOMC member’s projections are based on their assessment of the appropriate monetary policy to achieve the Fed’s dual mandate: maximum employment and stable prices.

The SEP also includes a discussion of the risks and uncertainties surrounding the economic projections. The FOMC participants consider a wide range of factors when making their projections, including geopolitical events, global economic conditions, and fiscal policy.

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

Why is the SEP Important?

The SEP is an important document for several reasons:

  • Policy Guidance: It offers insights into how Fed officials anticipate economic conditions to evolve, influencing their approach to monetary policy.
  • Market Impact: Financial markets closely analyze the SEP to gauge future policy changes, which can affect investment decisions and interest rates on debt.
  • Public Understanding: It helps the public 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 is the SEP Used?

By the Federal Reserve:

  • 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.

By Market Participants:

  • 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.