The Fed's View
Raymond James
Scott Brown
July 20, 2010
Federal Reserve Chairman Ben Bernanke will testify on the Fed’s semi-annual Monetary Policy Report to Congress this week. This is usually a big deal for the markets. However, there’s much less suspense this time around. The Fed’s views were already included in the minutes of the June 22-23 policy meeting. Fed officials lowered their projections of near-term growth and inflation, and about half saw the risks to their growth outlooks as tilted to the downside. However, policymakers felt that the shift in the near-term outlook did not warrant stimulus.
The Fed’s central tendency forecasts, which exclude the three highest and lowest forecasts of the five governors and 12 district bank presidents (growth and inflation projections are 4Q-over-4Q, the unemployment rate is the 4Q average for that year):
|
2010 |
2011 |
2012 |
longer run |
Real GDP |
3.0% - 3.5% |
3.5% - 4.2% |
3.5% - 4.5% |
2.5% - 2.8% |
Apr. Proj. |
3.2% - 3.7% |
3.4% - 4.5% |
3.5% - 4.8% |
2.5% - 2.8% |
Jan. Proj. |
2.8% - 3.5% |
3.4% - 4.5% |
3.5% - 4.5% |
2.5% - 2.8% |
Unemp. Rate |
9.2% - 9.5% |
8.3% - 8.7% |
7.1% - 7.5% |
5.0% - 5.3% |
Apr. Proj. |
9.1% - 9.5% |
8.1% - 8.5% |
6.8% - 7.5% |
5.0% - 5.3% |
Jan. Proj. |
9.5% - 9.7% |
8.2% - 8.5% |
6.6% - 7.5% |
5.0% - 5.2% |
PCE Prices |
1.0% - 1.1% |
1.1% - 1.6% |
1.0% - 1.7% |
1.7% - 2.0% |
Apr. Proj. |
1.2% - 1.5% |
1.1% - 1.9% |
1.2% - 2.0% |
1.7% - 2.0% |
Jan. Proj. |
1.4% - 1.7% |
1.1% - 2.0% |
1.3% - 2.0% |
1.7% - 2.0% |
Core PCE |
0.8% - 1.0% |
0.9% - 1.3% |
1.0% - 1.5% |
|
Apr. Proj. |
0.9% - 1.2% |
1.0% - 1.5% |
1.2% - 1.6% |
|
Jan. Proj. |
1.1% - 1.7% |
1.0% - 1.9% |
1.2% - 1.9% |
Economic data were generally on the strong side of expectations in the early spring, leading Fed officials to raise their forecasts of 2010 GDP growth. Recent data have been soft, suggesting a near-term moderation in the pace of growth. The Fed’s longer-term growth outlook has been little changed
Bernanke’s testimony will present the Fed’s view of where things stood at the June 22-23 policy meeting. What’s happened since? Private-sector payrolls were reported to have risen by 83,000 in June – disappointing, but still positive. Retail sales fell 0.5% in June. Core retail sales, which exclude autos, building materials, and gasoline, edged up 0.2%, after falling 0.4% in April and 0.2% in May. Industrial production rose 0.1% in June, but manufacturing activity fell 0.4%. One month does not make a trend. However, these figures are consistent with a more moderate pace of economic growth in the near term. They do not indicate a double dip recession, but they do suggest some increase in downside risks to the growth outlook.
The Fed’s inflation outlook has continued to shift lower. The core CPI rose at a 0.6% annual rate over the first six months of 2010. In June, the Fed saw inflation as “likely to stabilize near recent low readings in coming quarters and then gradually rise toward more desirable levels.” The risk of deflation (a sustained decline in the overall price level) is small. That would depend on a more serious downturn in economic activity (possible, but the odds seem rather small). Still, Bernanke has previously spoken about the need to act swiftly and forcefully to counter the possibility of deflation. Fed officials appear to be divided on the risks and whether further policy efforts would be effective.
Further quantitative easing (purchasing long-term Treasuries or mortgage-backed securities) would seem pointless given that long-term interest rates are already low. Still, the Fed could lower the rate it pays on bank reserves to 0% and also expand efforts to improve securitization of consumer and business debt.
With conventional monetary policy exhausted for a while now and unconventional policy seen as difficult to achieve and of questionable impact, that leaves fiscal policy as the only game in town. Unfortunately, the odds of further fiscal stimulus are low. The economic recovery will likely take a lot longer.
(c) Raymond James
