Fed Projections: A Failed Recovery?

by Patrick Brennan

Yesterday, the Federal Reserve’s Open Market Committee announced its intent to extend “Operation Twist,” a bond-buying program intended to depress interest rates, but without expanding the bank’s balance sheet (by selling short-term securities to buy long-term ones, the idea is to push down long-term rates and “twist” or flatten the yield curve). This isn’t as stimulative as the third round of quantitative easing that some expected or hoped for, but it remains to be seen how well it works. There’s some unequivocally bad news, too: The Fed has revised its projections for unemployment and economic growth, and they look significantly worse.

The U.S. economy is now expected to grow by 1.9 to 2.4 percent in 2012, down from an April projection of 2.4 to 2.9 percent (notably, most Wall Street economists’ estimates now tend to lean more toward the Fed’s lower bound, centering around the high 1’s).

The unemployment picture might even be worse: The Fed expects an unemployment rate between 8.0 and 8.2 percent for the rest of this year (these are “central tendency” projections, the absolute lowest estimate they came up with for this year was 7.8 percent). And things hardly get much better in the near future: In 2013, they expect unemployment to range between 7.5 and 8.0 percent. 2014? Things really get rolling: 7.0 to 7.7 percent.

2013 and 2014 economic growth don’t look quite so dismal, at 2.2 to 2.8 percent and 3.0 to 3.5 percent respectively, but as the jobs projections suggest, that kind of economic growth isn’t the kind you’d expect in a robust recovery, and is hardly enough to produce jobs sufficient to meet population growth and drag down the unemployment rate. The relevant graphs are below:#more#

Finally, the Fed’s projected inflation numbers (1.2 to 1.7 percent for 2012, 1.7 to 2.0 for core prices) will further disappoint those calling for looser money — the Fed continues to consider a 2 percent inflation “target” to be a pretty solid ceiling. 

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