FT: Fed To Slash Growth Forecasts

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Pessimistic Fed to slash growth forecasts

By Robin Harding in Washington

November 21 2010

The US Federal Reserve will slash its growth forecasts and predict higher unemployment when it releases updated economic projections this week.

The Fed will release the latest forecasts made by members of its rate-setting open market committee on Tuesday, alongside the minutes of their November meeting, giving a complete picture of why they launched a new $600bn round of asset purchases.


When the FOMC published its last forecasts in June most members thought that 2011 growth would be between 3.5 and 4.2 per cent, but many now think growth will be between 3 and 3.5 per cent, and some expect less than that.

FOMC members have made particularly aggressive upward revisions to their unemployment forecasts, with a large number now predicting that it will still be 8 per cent or above at the end of 2012, compared to the 7.1 to 7.5 per cent that they forecast in June.

“Because I expect hiring to strengthen only gradually, the unemployment rate is likely to remain elevated for quite some time. In fact, I do not expect it to fall below 8 per cent before 2013,” Sandra Pianalto, president of the Cleveland Fed, said in a speech last week.

Some Fed officials have become concerned that workers have the wrong skills, or are trapped in the wrong places because they cannot sell their home, and will struggle to find jobs even once the economy fully recovers.

These officials may raise their forecasts of long-term unemployment by a full percentage point to more than 6 per cent – although the rules for forecasting mean they must disregard any rise that they think is due to the extension of unemployment benefits that will expire.

The committee will also issue 2013 forecasts for the first time and officials who supported further asset purchases are likely to predict that core inflation will stay below the Fed’s 2 per cent goal for the next three years.

“It is not unreasonable to expect 1 per cent inflation in 2012. Unless the actual conditions turn out to be very different from my forecast, inflation of less than 1.5 per cent in 2013 is a strong possibility,” said Charles Evans, Chicago Fed president, in a speech last month.

The minutes themselves will provide vital detail on why the Fed chose the exact policy that it did – $600bn of asset purchases by the middle of 2011 – and the degree of opposition within the committee.

Only Thomas Hoenig, president of the Kansas City Fed, voted against the decision but other FOMC members, such as governor Kevin Warsh, have unsettled the markets with lukewarm speeches about the policy. “I consider the FOMC’s action as necessarily limited, circumscribed, and subject to regular review. Policies should be altered if certain objectives are satisfied, purported benefits disappoint, or potential risks threaten to materialise,” said Mr Warsh in a recent speech.

Fed-watchers will hunt for any clue on the conditions that might induce the central bank to expand the programme from $600bn or else to reduce its size.

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Justacommeman

That's weird. I was told recently by folks here on CU that things were really improving.

This gives Ben a green light to work on QE3 and keep rates at or near zero for a long long time. Hold on to your dollars at your own peril.

Thanks Storm. MJ

ksammut

Will this report help send gold to $1400 and silver to $29.00 in the next 5 or 6 trading days?

I think I would take that bet.

jmski52

I'm always confused as to how a declining jobs picture combined with money printing and a tepid economy with a rolling housing market disaster adds up to 1.5% inflation or less.

It's one of two things:

1) Either I simply don't have a grasp on reality, or

2) Somebody's lying through their teeth


There sure are a large number of people who want to imagine that there's no problem. I would too, if I had been sold the same story for 40 years, and if I truly believed that stocks & bonds were a growth type of investment.

How many more years will go by until the baby boomers start liquidating their 401Ks and mutual funds in order to fund what's left of their retirement? Where's the offsetting investment going to come from when the boomers start trickling their holdings back into the stock & bond markets? I'm sure that it's already started and it bound to increase.

Is it going to come from the next generation who are scrambling for the remaining jobs that haven't yet been outsourced, or from those who still have some of the remaining manufacturing jobs?

Congress is going to be gridlocked like a vault for the next 2 years, and nothing will be done to address the fiscal side. How much more creative accounting can the system stand before it simply breaks down across the board? It's already happened once. Unlike a Hemingway novel, the broken parts don't get stronger in the places where they were broken, especially if you don't fix any of the problems that caused the breakdown. The Fed is in a box and there's only one way to go, in my opinion. Look out.

cohodk

The stock market slashed growth forcasts 6 months ago.


So far the Feds plan is working---to get people out of bonds and into stock and commodities. We've had a little selloff in bonds and a rally in commods/stocks.

cohodk

I'm always confused as to how a declining jobs picture combined with money printing and a tepid economy with a rolling housing market disaster adds up to 1.5% inflation or less.

jmski52,

"Sustainable" inflation comes from rising wages. We are far from that, in fact, wages are declining in the US and Europe via reduced benefits. We may have some spikes in prices due to fear, supply/demand constraints, and/or excess capital flows, but these will all prove short-lived unless wages increase.

China is putting on the brakes because inflation rates in the last month or 2 are above projections. Well, what did China do in early Summer?---gave all its workers a pay raise. If people have more money to pay for things then prices will go up. Its pretty simple, if people cant afford it, then they will not buy it. If they dont buy it, then prices will-at best-remain stable.

mrearlygold

Hope














Change

roadrunner

The FED's goal of "core" inflation <2% for the next several years doesn't say anything about the items not included in the core figures. What they won't guarantee is what will happen to food, energy, and metal prices. Wages can stay weak and those non-core items can continue upwards for years. If home prices/rents as well as durable goods stay relatively tame over the next few years, which seems to be a very reasonable assumption, then overall inflation figures, esp. the jury-rigged CPI, can appear quite palatable. Once raw commodity prices rise, it takes a while to see them in the producer price index, then even longer before they show up to consumers. It could take a few years before consumers see the full effect of rising commodity prices. And that will fit the FED's timetable of more QE2/lower growth for several years just perfectly. Unfortunately by then, the FED will say they never saw it coming but the inflationary theft will be complete.

roadrunner