The Fed's Math Just Doesn't Add Up

Includes: DIA, GLD, QQQ, SPY
by: Markos Kaminis

Is it just me, or did anybody else notice that the Fed's numbers don't add up? The Federal Reserve published its updated economic forecasts Wednesday alongside its monetary policy statement. We were anxiously awaiting the report to see just how bad the damage was going to be. After all, the Federal Reserve Chairman himself had previously stated that there would be a pretty substantial impact to economic growth from recent fiscal policy.

At 2:00 PM EDT, when the forecast hit the wire, there was just dead silence. The SPDR S&P 500 (NYSEARCA:SPY), SPDR Dow Jones Industrial Average (NYSEARCA:DIA) and the PowerShares QQQ (NASDAQ: QQQ) did not tank like we had expected them to. And why should they, considering that there was hardly any change whatsoever to the Fed economic forecast. By the end of the day, the SPY, DIA and QQQ had all gained ground, and the defensive SPDR Gold Shares Trust (NYSEARCA:GLD), which I suspected would have a good day, lost it. There should have been a change to the forecast. The Fed's got some explaining to do.

The reason we were expecting a change was because in his semi-annual address to Congress, Federal Reserve Chairman Bernanke said that he agreed with the Federal Budget Office in regard to the economic impact of sequester spending cuts and other recent fiscal policy. He even said it again on Wednesday in his press conference following the FOMC monetary policy release. He said there would be a 1.5 percentage point drag on economic growth this year that included a 0.6 point burden from the sequester spending cuts. Much of the rest of the weight fell on the expiration of the payroll tax break at the turn of the year, which was a part of the fiscal cliff.

I could not believe that not one reporter asked why then the Fed's economic forecasts had not been adjusted for that expectation. Because in September and December when the same forecasts were published, they were not much different than they are today. In this latest Fed forecast, the Fed only cut its 2013 GDP growth estimate by two-tenths of a point at the top end of its forecast range. See the table here for the evolution of the Fed's GDP growth expectation for 2013. There's no sign of this phantom drag Chairman Bernanke keeps mentioning.

Date of Forecast Publishing

2013 GDP Growth Range Forecast

March 2013

2.3% to 2.8%

December 2012

2.3% to 3.0%

September 2012

2.5% to 3.0%

Click to enlarge

Forgive me if my math is not up to speed, but if the Fed were incorporating the 1.5 point adjustment, shouldn't the March range have read +0.8% to 1.5%? I suppose there could have been a countering offset that could be lifting growth by 1.3 points this year, but I did not hear any such discussion. There was no mention of some unexpected surprising economic sector adding lift to the economy. There was no announced expectation that the recently stress test cleared Bank of America (NYSE:BAC) and Citigroup (NYSE:C) would be easing on their lending standards and driving business investment. Neither was there much of a good signal coming from Caterpillar (NYSE:CAT) about any commercial construction boom. There was no explanation. Rather, there was just the reiterated statement about a mystical 1.5 percentage point drag on economic growth. Perhaps the Fed can respond here and answer my question as to why doesn't the math add up?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.