If Possible, Fed Forecasts Are Worse Than Its Policies
One might think that the qualification to become a governor of the Federal Reserve Board is to be an eminent economist. But the real qualification is a professional optimist. Here's why.
The FOMC released a statement on December 18 which said "The committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace..."
Translated into ordinary English: the economy has been doing really badly and we hope that it is going to do better in the future.
Curiously, the exact same statement could have been made by the FOMC at any time in the past several years.
During that period, the economy was performing abysmally, and the Fed regularly projected that the economy would do much better in the future.
Unfortunately, the Fed's hopes never translated into reality.
· In 2010, the Fed forecast that the economy would grow at about 4 percent in 2013.
· In 2011, the Fed's forecast for 2013 growth declined to 3.2 percent.
· In 2012, it was lower still, at 2.6 percent.
· Now, in 2013, the Fed thinks that GDP growth this year will be about 2.3 percent.
The third-quarter GDP growth rate of 4.1 percent was driven by spending on inventories, which will detract from fourth-quarter growth.
The year 2013 is not an anomaly. Over the past few years, the Fed's forecasts have regularly overshot reality.
· In 2010, GDP growth in 2012 was supposed to be 4 percent-it ended up at 2.8 percent.
· In 2010, the median Fed forecast for 2011 growth was 3.3 percent. The reality was 1.8 percent growth in 2011. The Fed cannot even forecast GDP growth a year out.
So the FOMC, yet again, is telling us that better times are just around the corner for America. The Fed is forecasting 3 percent growth for 2014 and 3.2 percent growth for 2015.
The Fed keeps telling the same story and one day it will be true. A stopped clock is right twice a day. But that does not mean that the stopped clock tells time, much less than a stopped clock causes time to change.
Forecasting is a difficult business, and many private sector groups have equally poor records. But they are not charged with keeping a stable currency.
As a reaction to better-than-expected growth, the Fed is reducing monthly bond and mortgage-backed securities purchases slightly from $85 billion to $75 billion, but keeping interest rates low.
The Fed should stick to the only thing it can affect-inflation. The pretension that the Fed can control unemployment and economic growth does a disservice to the Federal Reserve, to Congress, and to the American public. The Fed is not an oracle of growth. It should stop releasing press statements saying that it expects the economy to grow, because it has a poor track record.
Although Congress gave the Fed the dual mandate of keeping inflation and unemployment low, the Fed is not an employment agency. In order for the Fed to be able to affect employment levels, you have to believe in Keynesian economics-that the Fed can fool people over the long run by priming the pump.
The past five years shows that this has not worked.
A Fed chairman should do more than simply urge Congress to do something about the budget deficit. The chairman should emphasize that the Fed cannot keep the economy going alone. At the end of the day the policy levers that the Fed has to pull are very few.
Congress is lulled into a false sense of security because members think that they can leave the economy to the Fed. But economic growth is in Congress's hands.
If in 2014 Congress were to pass fundamental tax reform and entitlement reform, and exercise greater oversight over the executive branch agencies, businesses would increase investment and economic growth would pick up.
But Congress shows no signs of taking economic growth seriously. Even when forced to act, as in the recent budget deal, it neglects entitlement spending, one of the biggest drags on the economy.
Last week the FOMC stated, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."
After five years of highly accommodative monetary stance, the economy is growing at a sluggish pace and the percentage of Americans participating in the labor force is at 1978 levels. The Fed needs to admit that its policies are not working and that it is time for Congress to step up to the challenge of increasing economic growth.