Fed revises the forecast

A new notice was posted on the Federal Reserve's website, which reports 2015 GDP growth of 1.55%. The lower number implies that Fed staff took the -0.2% print of Q1 GDP as representative of the underlying momentum in the economy and carried some of that weakness forward into Q2 and perhaps beyond.

The low staff forecast explains much of the dovish shift in tone surrounding the June FOMC meeting. The 1.55% projection for Q4/Q4 growth in 2015 is very weak.  The Fed's June forecast yields a 0.9% Q2 growth rate.

"Should such a forecast be realized, the FOMC would likely postpone its tightening cycle until the economy reached a firmer footing. The forecast has not been realized", says Barclays.

September call is still expected. Data received since mid-June have generally surprised on the upside, pushing the Q2 tracking estimate to 3.4%. Fed staff will likely revise their 2015 forecast higher, as their Q2 estimate rises in response to the data flow. 

The upward revision to the forecast should give the FOMC increased confidence in the underlying momentum in the US economy, keeping them on track for a rate hike this year. Indeed, the Chair's less dovish tone in her testimony before Congress two weeks ago compared with that in the press conference following the June meeting likely reflects an upwardly revised staff forecast.