The Fed Marks Down Their Growth Forecast…Again

September 18th, 2013 at 5:14 pm

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.

–As I note here, the next Fed chairperson, whoever she may be, needs to consider recalibrating the Fed’s forecasting model, including a bigger role for financial markets, bubbles, and leverage.



Source: Federal Reserve

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4 comments in reply to "The Fed Marks Down Their Growth Forecast…Again"

  1. readerOfTeaLeaves says:

    –As I note here, the next Fed chairperson, whoever she may be, needs to consider recalibrating the Fed’s forecasting model, including a bigger role for financial markets, bubbles, and leverage.

    In addition, the influence of shadow banking appears to be growing by the month; and none of it appears to be calculated into government policy making.

    From a link at Jesse’s Cafe: ‘The True Size of the Shadow Banking System Revealed (Spoiler: Humongous)’

    If the shadow banking system continues to grow rapidly, then government models are working on an increasingly smaller share of the economic pie. If this is the case, then policy will become increasingly delegitimized, as larger sectors of economic activity grow beyond government control. Worrying.

    • Peter K. says:

      The Treasury dept. replied to Time magazine and said of the shadow banking system:

      “The risk in the so-called “shadow banking system” – the financial firms that operated outside of the protections and constraints we impose on banks – has fallen substantially since the crisis.

      Assets in the “shadow banking system” are roughly half the level seen in 2007. Funding through tri-party repurchase agreements has fallen 40 percent from its peak in 2007, and asset-backed commercial paper outstanding – which was often used to fund leveraged off-balance sheet vehicles – is a third of what it was in 2007.”

      The media and academia should focus more on the Fed’s constant downward revisions. I had a gut feeling they wouldn’t taper because of their poor forecasting record. The data wouldn’t come in as they predicted.

  2. Fred Donaldson says:

    Back from a two-week vacation in South Carolina, a state where folks sit down next to you at a bar and ask if you “are a liberal or conservative” or something similar, and then launch into explanations of why the fed is bad, Rand Paul is right, and free enterprise means no regulations.

    Highlight of the trip was listening to a fellow, who had inherited a direct marketing (those phone calls!) firm from dad, and thought the minimum wage was holding back the country. He explained “there are jobs I need done for a few hours, digging a hole or something, that aren’t worth $7.25 an hour, so I pay a lot less.” He looked like he never dug a hole.

    The general idea is that smart people deserve to make mucho money and poor people are their victims. The Fed taper will raise interest rates, reduce home ownership, and force more folks to rent from those with money to invest in buying houses. The efforts to increase down payments and hike needed credit scores are described as the “New Normal” – same as lower worker wages, reduced safety net and generally less upward mobility for the lower and middle classes.

    By the way, after some of these bar conversations, many opinions and mindsets seemed to change, but not mine.

    • purple says:

      From the same types I’ve heard that: “being homeless pays $30 a day in begging tips so why would someone take a minimum wage job ?”

      Clearly then, if true, we need to make being homeless as excrutiating as possible rather than increasing the minimum wage.