I’ve already given Ben&Co. a shout out for holding off on the taper, i.e., continuing their monetary stimulus at the same pace instead of beginning to dial back the asset-buying program. Clearly and appropriately, they were motivated by continued weakness in the macro-economy and the job market. The recovery remains fragile, and higher interest rates associated with even hints of Fed tightening right now aren’t helping. That self-inflicting wound machine known as the US Congress is also gearing up for a repeat performance of the shut-down, debt ceiling circus we all loved so much a few years back.
Another motivator for today’s surprise move is yet another mark-down of their GDP forecast. The figure below shows the average Fed forecast for this year’s real GDP growth (Q4/Q4) starting in January 2011 when they thought we’d be cruising at a smart clip by now, all the way through to today’s forecast where they think we’ll be puttering along at-or-slightly-above trend by the end of the year.
The figure suggests a couple of points:
–Like most forecasters, the Fed underestimated the depth and persistence of the downturn; though they’ve applied both conventional and creative monetary policy to push back hard, for which I give them a lot of credit–they’re really the only policy makers in town trying to do something about the output gap–the pattern in the figure has no doubt contributed to a hesitancy to undertake the bold moves that Christy Romer wisely calls for here.
–Surely the markdowns are partly a function of austere fiscal policy. That is, in their earlier forecasts for 2013, they could not have foreseen sequestration, the premature ending of the payroll tax break, and other measures that created the fiscal headwinds currently extracting 1-1.5 percentage points off of GPD growth this year.
Source: Federal Reserve