Pessimistic Fed to slash growth forecasts
By Robin Harding in Washington
FT.com / US / Economy & Fed - Pessimistic Fed to slash growth forecasts
Published: November 21 2010 20:07 | Last updated: November 21 2010 20:07
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.
The revised forecasts will show how the Fed became much more pessimistic over the summer and also highlight fears among a few members of the FOMC that some of today’s 9.6 per cent unemployment rate is structural and will take years to cure.
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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Pessimistic Fed to slash growth forecasts
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