Good News: Fed Predicts Slow Economic Growth

Good News: Fed Predicts Slow Economic Growth

We can now be assured of improved economic growth in the years to come.

Why?  Because the Federal Reserve Board is predicting slow growth.  And the Fed is always wrong.

That may seem harsh, but throughout the Obama administration, the Fed predicted stronger economic growth than the U.S. ultimately experienced.united-states-gdp-growth-forecast@2x

Consider the Fed’s record for the past five years. The Fed projected growth of 3.0% to 3.6% for 2011; actual growth turned out to be half that–just 1.6%. For 2012, the Fed projected growth of 2.5% to 2.9%; the actual rate was 2.3%. For 2013, the Fed projected 2.3% to 3% growth, but actual growth was 2.2%. For 2014, the Fed projected 2.8% to 3.2% growth, and the actual rate was 2.4%. Finally, for 2015, the Fed projected 2.6% to 3.0% growth and the actual rate was 2.4% again.

Are you seeing a pattern here? Five years of predictions, five years of overly optimistic projections. The Fed has been almost as incompetent about predicting growth as it’s been at producing growth.

Fed Goes Conservative

Now we have a new Republican administration, but it’s the Fed that’s gone conservative. The allegedly nonpartisan Fed is predicting that the economy will grow by just 1.9% in 2016, 2.1% in 2017, 2.0% in 2018 and 1.9% in 2019. Longer term, the growth rate is projected to be just 1.8%.

This flip flop from overly optimistic projections to pessimistic projections raises a few questions:

Is the Fed doing the opposite of what is warranted by its projections?

During the Obama administration, the Fed’s projections were consistently rosy and its policy statements sounded like we were a step away from economic nirvana. And yet the Fed took unprecedented steps with its monetary policy, following its zero interest rate policy (ZIRP) for nearly eight years.

The Fed typically follows a loose money policy when the economy needs a boost. If the economy was performing as well as the Fed said it was, why did the Fed continue ZIRP for so long?

Conversely, as the Fed predicts slower growth, why is it tightening its monetary policy and raising interest rates? Granted, rate increases are overdue and the Fed is raising rates slowly, but there’s a disconnect between Fed predictions and Fed policy.

Is the Fed just being more realistic?

Some believe the low-growth period the U.S. has been going through is the “new normal,” and that it’s here to stay, along with less credit growth, lower wage growth and lower inflation. Bloomberg suggested this is happening as “new financial regulation, slower population growth, an aging society and risk aversion take their toll.”

Bloomberg might have also blamed higher taxes and contagion from slow economic growth worldwide, in addition to other regulations, not just financial regulations.

We believe low growth as the new normal is Keynesian mythology–a feeble excuse to explain why eight years of Keynesian policies have failed to spur economic growth. Let’s try deregulation and tax reform before we jump to conclusions about a new normal.

After eight years of higher taxes and a record-setting regulatory spree, there should be a lot of pent up demand for more business investment.

With baby boomers retiring, it would also help to replace them with well-educated, industrious immigrants. That may not happen during the Trump Administration, but we’ll settle for less regulation and lower taxes.

“Fed Chair Janet Yellen and colleagues may be gun shy after being wrong for so long, but the 2% growth estimate essentially builds in no benefit from new supply-side economic policies,” according to The Wall Street Journal. “If growths stays that slow, Mr. Trump will be firing advisers left and right.

“The current Fed governors and staff are steeped in Keynesian models that don’t see much benefit from tax cutting or deregulation. So perhaps their own spirits aren’t as aroused as investors seem to be by the Trump-Congress policy mix.”

It’s also worth noting that the economy is cyclical. While the recovery has been abnormally slow, we’re overdue for a recession. The average recovery since the end of World War II has been 58 to 61 months, depending on whose numbers you use. The current “recovery” reached the 58-month milestone in April 2014, which was 32 months ago. The only recovery that was significantly longer took place during a 119-month stretch in the 1990s.

It’s doubtful, though, that the Fed’s growth projections are based on the belief that a recession is coming. Read a Fed policy statement and you’re unlikely to find a single reference to business cycles, which apparently don’t exist in Fedland.

Is the Fed really non-partisan?

The Fed predicted strong growth during the Obama years. It’s predicting slow growth during the Trump years. Is the Fed, which is supposed to be nonpartisan, being political? Fed predictions could affect consumer confidence, so they have the potential to be self-fulfilling (or they might, if anyone ever paid attention to what the Fed says).

Members of the Federal Reserve Board of Governors are appointed by the president to 14-year terms. Fed Chair Janet Yellen was appointed by President Obama.

“I have never seen political views in any way influence the policy judgments that are made inside the Federal Reserve,” Yellen has said.

And yet even the pundits and economists predicted correctly that the Fed would not increase interest rates before the election, but would increase rates at its first post-election meeting in December. Why wait until after the election–unless you’re trying to influence election results?

Of course the Fed is non-partisan … just like the media, academics and economists.

If you enjoyed this post, please consider leaving a comment or subscribing to the RSS feed to have future articles delivered to your feed reader.