Fed slashes projections

For those living under a rock, last night was the Fed meeting for October and the results are below.

First, the Statement:

Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

And the press conference:

Finally, courtesy of Calculated Risk, the slashed projections:

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1 2011 2012 2013 2014
Jan 2011 Projections 3.4 to 3.9 3.5 to 4.4 3.7 to 4.6 NA
April 2011 Projections 3.1 to 3.3 3.5 to 4.2 3.5 to 4.3 NA
June 2011 Projections 2.7 to 2.9 3.3 to 3.7 3.5 to 4.2 NA
November 2011 Projections 1.6 to 1.7 2.5 to 2.9 3.0 to 3.5 3.0 to 3.9
David Llewellyn-Smith


  1. There is vehement political opposition to further Q-E, so you would think there would have to be a return of distressed conditions before they would venture there.

    The US public (probably rightly) see Q-E as benefiting bankers and speculators rather than households and businesses, and as not helping solve the big problem – the lack of jobs. QE-2 really only seemed to drive up energy costs so directly harmed households, though I think the energy spike was more to do with the Arab spring than Q-E.

    Still, lethargy in the US economy is now regarded as a passably good outcome. In national accounting terms, as long as the US economy remains in external deficit and the public sector is reducing its deficit, then the private sector must be increasing its deficit. The household sector must therefore remain under pressure, especially as business continues to invest strongly in labour-replacing technologies.

    We can see this in the inflation-adjusted data. Employment growth is stable and positive but slow, incomes are essentially static, savings are weak (and lately have been falling). The pressure vent has been consumer price inflation, which has been running close to 4%. So real incomes, real consumption and real savings have been falling.

    US businesses and households seem to have evolved a holding strategy. This will have to continue for a very protracted period until the US achieves fiscal balance and its external accounts improve. Maybe the US faces 10-15 years of this kind of grinding adjustment. You have to wonder about the ability of the US economy to withstand new shocks. Maybe they are holding QE-3 for that depressing eventuality.

    Looked at globally, you can see the problems that result from large and permanent imbalances in trade flows. The US really needs to achieve external balance if it is ever going to grow its economy at potential. The same thing goes for the debtor economies in the Euro zone. Meanwhile, the economic models of China and India are predicated on running permanent external surpluses.

    This is just unsustainable. Something has to crack. And what is cracking now is fiscal stability in the deficit economies. This has feedback effects into the financial sector (in Europe) and the real economy (in both the US and Europe, and now in China and India too). The wings have fallen off the global system.

    There must be an adjustment, which I suppose is what we are seeing unfold on a daily basis.