PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The Fed and Economic Growth Projections

By at 22 March, 2018, 8:43 am

by Raymond J. Keating-

On March 21 in its FOMC statement, the Federal Reserve provided its latest decision on monetary policy, along with its take on the economy.

The Fed decided to move the federal funds rate up from the 1.25%-1.5% range to 1.5%-1.75%. That wasn’t surprising, and given the still low levels, it’s not much of a factor for the economy. In fact, the Fed noted, “The stance of monetary policy remains accommodative…” The Fed’s expectations, whether accurate or not, point to inflation continuing to run around the 2 percent mark.

More interesting, and a bit troubling, was the Fed’s declarations on the economy.

The Fed noted that “economic activity has been rising at a moderate rate.” Then adding, “Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.”

Indeed, this latest statement on the economy is a step down from the January 31 FOMC statement, in which it was declared, “economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low.”

Meanwhile, in its economic projections, the median projections on real GDP growth looking ahead improved slightly from the previous projections. However, even these new expectations point to an under-performing economy, with expectation at 2.7 percent real growth (range of 2.5%-3.0%) for 2018, 2.4 percent (range of 2.0%-2.8%) for 2019, 2.0 percent (1.5%-2.3%) for 2020, and 1.8 percent (1.7%-2.2%) over the long run.

Of course, like any other group of economists and analysts, the Fed does not have a crystal-clear view of where the economy is headed. Indeed, the Fed has proven to be notably inaccurate in its economic projections at various times over the decades.

In contrast to the noted moderation, Fed Chairman Powell in his opening statement at his press conference did say that “the economic outlook has strengthened in recent months.”

In the end, economic growth is about getting the foundational policy mix right – primarily, light tax and regulatory burdens, free trade, limited government spending and debt, strong property rights, and price stability via sound money – so that entrepreneurship, private investment, innovation and productivity can flourish. To the extent that the U.S. gets this mix right, there’s no reason why our economy cannot grow, at the very least, at the historical average of better than 3 percent.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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