Fed sees a gloomier future
The Federal Reserve is just out with its latest economic projections. Since the last edition in June, they’ve turned gloomier for the short, medium, and long term. They see growth as slower, and unemployment as higher, for 2011, 2012, 2013, and for the “longer run” than they did just three months ago. For this year, they’re looking for GDP growth to average 1.6–1.7%, compared with a projection of 2.7–2.9% in June. They see unemployment as staying in its current 9.0–9.1% range, instead of falling into the high 8s. For next year, they see growth at around 2.7% instead of 3.5%, and unemployment around 8.6% instead of 8.0%. And for the long run (in which we’re all dead, of course), they’re a little gloomier than they were in early summer (I’m not quoting numbers, lest reader fatigue set in—they’re at the link). Their forecast for very modest inflation remains unchanged.
What does this all mean? One, the Fed is likely to remain very indulgent. I don’t get the complaints coming from a lot of left–liberals about they’re not doing enough. They’re doing about all they can, given the limits of monetary policy amidst such economic wreckage. They need fiscal help, and they’re not likely to get it. Two, the recovery from the economic crisis is likely to take even longer than most prognosticators prognosticated; the Fed has a pretty good track record in forecasting. And three, elite projections for the long term—not just the Fed, but the CBO as well—are quite gloomy, and popular discourse hasn’t really caught up to this fact.
Maybe they’re wrong, and a boom will take us by surprise. But even so, shouldn’t we be talking about this openly?
I know that you disagree with the argument that the Fed could do more, but I think it is quite simple and not particularly mysterious:
1. Fiscal stimulus that produces above-average growth would also produce above-average inflation.
2. The Fed can always prevent that by tightening, sterilizing gov’t spending by slowing private spending.
3. If they won’t do that, they should say so. Controversial, I know, but the Fed actually has to be *for* lower unemployment–so far they aren’t.
4. To really convince us they want less unemployment and would let fiscal stimulus work, they should do more QE and cut interest on reserves (which contributes to the liquidity trap).
5. Expectations of future spending levels drive current spending levels. Higher GDP expectations create higher GDP now.
6. Proving to us that they would allow fiscal stimulus eliminates the need for it.
Where’s the problem?
I am one of those left-liberals who believe the FMOC could do more if they so desired. Chicago Fed President Evans dissented because he believes their hair should be on fire over mass unemployment.
The Fed forecasts since 2008 at least have been overly optimistic and regularly downgraded at subsequent meetings. Bernanke was asked about it at the press conference and he replied that they were unlucky (Japan disaster, debt-ceiling clown show, etc.)
Does the CBO still have those ridiculously pessimistic forecasts about slow growth, slow productivity growth, etc.? That should be discussed more.
What would be the economic basis for a boom? Hasn’t economic growth in the recent past been bubble-driven?
The Fed’s entire strategy since 2008 has been about propping up select asset prices for banks and the wealthy. The reason their strategies are not working for the working class is because they are not designed to. Bernanke minimized the subprime crisis even as it was happening, and has spent most of his tenure scolding about the deficit – i.e. our ‘bloated’ entitlements. It is only in the last few months that he has shifted tack on the latter even minimally.
The ad I see is funny – “A New Monetary System is Coming! Are You Ready? Click here to be prepared. Goldsilver [dot] com.” I was hoping for M&Ms – plain = 1 cent, peanut = 5 cent…
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I think the argument that the Fed could do more is pretty straightforward, even if you disagree: Huge monetary injections have been ineffective because people expect them to be removed when slight inflationary pressure appears. If expectations can hold back inflation even in the face of this increase in base money, then they probably (although not certainly) could hold it back just a bit less to allow for growth. More hiring from more demand would by necessity lead to slightly higher inflation. If the Fed wants jobs, it should say it will allow some inflation (or simply say it wants more NGDP growth, which combines growth and inflation).
The argument that the Fed can do more is simple. Growth will create inflation. There’s more than enough money out there to create growth. But right now all that money isn’t having any effects because people do not expect the Fed to allow growth (and by extension, slight inflation).
Usually people expect the Fed to pull away the punch bowl only when the party is getting out of hand. Now they expect the Fed to pull away the punch bowl before the party even gets started. And no one is going to come to such a lame party.
It’s interesting that forward contracts such as the eurodollar and fed funds futures strips are pricing in interest rate hikes in 2014. Commodity futures also imply tighter monetary policy. It seems that the market also isn’t taking Bernanke seriously. Perhaps popular discourse will have to wait for the lead of the market…