The Federal Reserve concluded its Federal Open Market Committee meeting and issued monetary policy Wednesday as usual, but it also adjusted its economic forecasts downward. Last projected in June, before the summer slide, the Federal Reserve reduced its GDP projections for this year and the long-term, raised its unemployment expectations, and hiked its near-term inflation view. In other words, it was an all around bad chew.
The market took it like a champ, with the Dow hanging in the green after the news, and even climbing higher. However, that was probably the result of an already well understood change in the economy since June. Besides, the market had anxiously anticipated the release while edging lower heading into it. Still, what the Fed had to say should have been more concerning to markets, in my view, especially since in my observance it has generally failed to forecast adequately. That includes the now infamous description of the housing crisis as “isolated,” by the Fed Chief himself. This in turn worries me that the Fed’s documented near-sightedness will leave it a day late and a dollar short when inflation inevitably roars in the future.
The Federal Reserve’s forecast (.pdf) for Gross Domestic Product (GDP) indicates a reduction in consensus expectations (among its forecasters) for its growth projections. The GDP growth forecast for this year has been cut to a range of 1.6% to 1.7%, down from a hopeful 2.7% to 2.9% forecast in June. That’s more than a point lower, quite a difference for a five month interval between publishing. The Fed went ahead and cut its projections for 2012 and 2013 as well, which could be a red flag.
My reasoning for doubt is because if the capacity is there, our mature economy should be able to reach absolute levels of productivity over a certain time span, and that should not be dependent upon what was accomplished the year before. We are not India or China, where important new ground is broken each quarter. Because of the way the changes occurred across the projection spectrum, I have to question the contemplation given to the components of the published forecasts. Only the highest degree of such should apply to the most important of economic forecasts for our nation.
Despite my lack of faith in the figures, I will go ahead and fill you in with regard to the rest of the data. The Fed sees unemployment much stickier now than it did in June. Where it had projected unemployment to improve to between an 8.6% and 8.9% rate, it now sees 9.0% to 9.1% for 2011. In 2012, the Fed sees stubborn unemployment only improving to 8.5% to 8.7%, versus the 7.8% to 8.2% it thought it saw previously.
With regard to Core PCE Inflation, the Fed now expects 2011 to mark between a 1.8% to 1.9% rate this year, up from its June expectation for a tamer 1.5% to 1.8% price increase. The Fed’s forecast for between a 1.5% to 2.0% increase in 2012 and 1.4% to 1.9% rise in 2013, tells me it currently sees a mid-to-late year 2012 change in monetary policy; I believe that is where we can currently place expectations to see it begin hiking rates. I think what you can bet will play out, though, is a Fed losing control of the situation, but that issue is for another article.