FED VIEW |
The consensus view of 47 private sector national economists expressed in the previous Thredgold posting is roughly supported by the latest official forecast of the Federal Reserve. It is equally “dismal,” a term used recently by Fed Chair Ben Bernanke.
The Fed’s forecast for the American economy has also been downgraded sharply in recent months. While the Fed expects modest economic growth to return later this year, it won’t be enough to offset decline during the first half.
“If we can take strong and aggressive action, including the Fed’s actions to try to improve credit markets, I think we can break the back of this thing and that we will begin to see improvement in 2009,” noted Bernanke in a speech on February 19. “If we fail to take adequate actions, the situation would continue to deteriorate.”
Fed Forecast
The table notes the official Fed forecasts (say that three times quickly). The number ranges exclude the three highest and three lowest forecasts of the 16 sitting monetary policy makers (The Wall Street Journal).
Employment Pain
The unemployment rate is now expected to approach 8.8% later this year. While the forecast does see some decline in the jobless rate during 2010 and 2011, the rate is not expected to return to a more acceptable 5.0% level until 2012 at the earliest. By comparison, the U.S. unemployment rate, currently 7.6%, averaged 5.8% during 2008 and 4.6% during both 2006 and 2007.
The Fed’s forecast for inflation suggests it will remain under control, with a longer-term outlook ranging from 1.5% to 2.0%. Many economists would agree with this view, although there is a wide disparity between those forecasters who expect to see sharply higher inflation pressures in coming years versus those who see the most likely scenario being a Japanese-style deflation after 2010.
Solid Growth
Like the view of private sector economists, the Fed has delayed its growth expectations, not dismissed them. The Fed’s 2.5%-3.3% real growth expectation for 2010 would return the U.S. to more traditional growth norms.
The 3.8%-5.0% growth expectation for 2011 would be closer to economic boom conditions, likely driven by the impact of current massive fiscal policy pursuits (think Obama’s $787 billion stimulus program) and the Fed’s monetary stimulus, with the current 0.00%-0.25% federal funds rate the lowest ever. The issue of pent-up demand by millions of consumers also likely drives the Fed’s optimistic growth projections, once we (finally) get through 2009…
…didn’t we say that about 2008?
Lowest Since 1955
As noted before, the sharp decline in U.S. inflation pressures—tied to the plunge in oil and other commodity prices of the past eight months—gives the Fed “cover” or support for its aggressive monetary actions. The Consumer Price Index (CPI) over the most recent 12-month period was unchanged, the best performance in 53 years.
The CPI rose 0.3% in January. The increase was the first monthly rise in six months. The rise was actually comforting to those who fear that deflation, or falling prices, will be the Fed’s major challenge in coming years.
Jeff Thredgold is an economic consultant to Zions Bank
Featured in the 25 February 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.
*Artwork from franckie under Creative Commons license at Flickr.com.
