The Federal Reserve significantly reduced its forecast of economic growth through 2013, acknowledging that it had once again overestimated the nation’s recovery from the 2008 financial crisis.
Despite the bleak forecast, however, the Fed said that its policy-making committee had decided against taking new measures to stimulate growth at a two-day meeting that concluded Wednesday. The Fed’s chairman, Ben S Bernanke, said that the central bank already was pushing hard to spur growth and create jobs.
“We have taken a lot of actions,” Bernanke said at a news conference after the announcement. He added that Congress, by contrast, was not doing enough to pull the levers of fiscal policy. Lawmakers are gridlocked over a new jobs proposal from the White House, and a special bipartisan committee charged with reducing the deficit is struggling to reach agreement by Thanksgiving. “I think it would be helpful if we could get assistance from other parts of the government to help create more jobs,” Bernanke said.
The central bank predicted that the economy would expand 2.5 per cent to 2.9 per cent in 2012, well below its June projection of 3.3 per cent to 3.7 per cent. For the following year, 2013, the Fed predicted growth of 3 per cent to 3.5 per cent, down from a range of 3.5 per cent to 4.2 per cent.
The unemployment rate, it predicted, would still be at least 8.5 per cent at the end of 2012, at least 7.8 per cent at the end of 2013 and at least 6.8 per cent at the end of 2014. Such reductions probably would come in part from people abandoning the search for work, rather than those finding new jobs.
The unemployment rate was 9.1 per cent in September. The government will release October figures on Friday.
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This is a difficult time for the Fed and its chairman. Republicans charge that the central bank’s existing efforts have gone too far, sowing future inflation. Democrats say that in hesitating to do more, the Fed is ignoring the plight of more than 25 million Americans who cannot find full-time work. And the sluggish pace of growth, which continues to fall short of the Fed’s predictions, is a bright marker of its failure to stimulate a recovery.
Bernanke on Wednesday sought to argue that the Fed was trying to get things just right in maintaining a delicate but necessary balance between competing concerns about inflation and unemployment.
He said that Republican critics were ignoring the Fed’s record. Five years into the crisis, there is no sign of inflation.
“The area where we have fallen short obviously is on the unemployment side,” he said. “So I think that criticisms based on the concern about inflation have so far at least not proved to be very valid.”
But Bernanke also gave little satisfaction to liberal critics. This meeting tested what the Fed was willing to do when the economy was merely muddling along, and the answer that came back: Nothing new. Asked several times why the Fed had paused if jobs are a problem and inflation is not, Bernanke offered a description but not an explanation: The Fed is willing and able to do more, he said, just not right now.
The Fed’s economic forecasts do not have a particularly good track record, but since they are based on individual forecasts submitted by the 17 members of the Federal Open Market Committee, the Fed’s policy-making board, the numbers do offer a window into the state of their minds. In a word: glum.
The Fed’s assessment of the economy was slightly brighter than after the last meeting in September. The committee’s statement noted that growth has “strengthened somewhat” since summer thanks in part to increased consumer spending. But there is still a hole in the economy where housing used to be, and the unfolding financial crisis in Europe continues to shadow the domestic economy. The statement again noted “significant downside risks to the economic outlook, including strains in global financial markets.”
Still, the decision to pause won the support of nine of the 10 voting members of the committee. The one dissent came from Charles Evans, the president of the Federal Reserve Bank of Chicago, whose vote echoed his recent speeches in which he has criticized the Fed for caring more about inflation than unemployment. It was the first time since 2007 that a board member had dissented in favor of doing more.
The limiting factor appears to be inflation. The Fed projects — as do financial markets — that prices and wages will rise about 2 per cent a year, the level that the Fed considers healthy. Evans and outside critics want the Fed to trade a higher rate of inflation for reductions in unemployment. But Bernanke and a majority of his colleagues believe that this would unsettle the dearly bought belief that the Fed will keep inflation slow and steady.
The pressure to reconsider that stance has been eased by recent data, including the estimate that growth rose to an annual pace of 2.5 per cent in the third quarter. There is also the question of what Congress will do: Further cuts in spending, or a decision to end the payroll tax holiday, would strengthen the case for the Fed to start new aid programs. A plan to pay down the debt would have the opposite effect.
These considerations have suspended for now any movement toward a new round of stimulus, like the proposal by the Fed Governor Daniel K Tarullo that the Fed should resume buying large quantities of mortgage-backed securities to reduce the cost of mortgage loans, increasing demand for housing.
“While I do not shirk the responsibility of the Fed having to do what it can to meet its mandate, obviously a broad range of policies can affect growth and employment,” Bernanke said. “I hope that there will be a range of actions that will complement and supplement the Federal Reserve’s efforts.”
Bernanke indicated that the Fed does plan to expand in the near future the information that it provides about its outlook and policies. Such information can increase the power of those policies. For example, convincing investors that the Fed intends to maintain interest rates near zero for a longer period will tend to drive down rates on long-term loans — which are set in large part based on expectations about future short-term rates — thereby reducing the cost of borrowing for businesses and consumers.
A simple change would involve publishing the Fed’s predictions for the future level of the short-term interest rates, which it controls directly and has already said that it plans to hold near zero through mid-2013.
Diane Swonk, an economist at Mesirow Financial in Chicago, said the Fed could show greater concern for job creation by tying such a forecast to the unemployment rate, announcing that it would keep short-term rates near zero until unemployment dropped below 7 per cent, provided that inflation remained under control.
“This is how you would move toward it,” Swonk said, referring to Bernanke’s mention of the issue during his news conference. “And I think that that is exactly where they are heading.”
©2011 The New York
Times News Service