Economic View: The Fed’s Economic Projections (For What They are Worth)

By at 17 September, 2020, 9:38 am

by Raymond J. Keating-

Accompanying the Federal Open Market Committee’s statement released on Wednesday (September 16) were the economic projections that govern, to some degree, Fed policymaking. Among the many harsh lessons learned in recent months is that the business of projecting where the economy is headed is a dicey undertaking, to say the least. Indeed, that has always been the case, but a major exogenous event like a pandemic drives home the lesson in brutal fashion.

As for the FOMC statement, there wasn’t much that added value. Monetary policy will remain historically loose – indeed, even looser than the unprecedented looseness of the past 12 years – including the fed funds rate remaining in the range of 0 to ¼ percent.

But there was some unfortunate talk in the statement about allowing inflation “to moderately exceed 2 percent for some time,” which actually is troublesome, and adds to the uncertainty related to monetary policy. Contrary to the beliefs of those at the Fed and assorted Fed watchers, monetary policy is an inexact science, to say the least, and inviting a little inflation in has a way to turn ugly. For now, though, as the Fed noted, inflation has been running below 2 percent.

Meanwhile, the Fed’s median economic projections point to the economy – on a fourth-quarter-to-fourth-quarter basis – shrinking by 3.7 percent in real terms in 2020. That’s actually more optimistic than the Fed’s median forecast in June that expected the 2020 economy to fall by 6.5 percent. Note that this is a rather breathtaking revision in expectations in three months, and indicates that the Fed expects to major snapback in the economy in this second half of 2020.

At the same time, even with a median projection of 4.0 percent real growth in 2021, that would in effect bring the economy at the end of 2021 back to where it was at the end of 2019. The expectation for 2022 real growth is 3.0 percent.

Before anyone gets carried away with these projections, though, not only is estimating economic growth beyond a quarter or two, again, a chancy undertaking, consider that the range among economic projections at the Fed vary widely – and I mean wildly wide. For example, the range for real growth in 2020 goes from -5.5 percent to +1.0 percent; from 0 percent to 5.5 percent in 2021; and from 2.0 to 4.5 percent in 2021.

Do with that what you will, but it’s probably sound advice to not take any of it too seriously.

What should be taken seriously is what’s needed on the policy front to set a sound foundation for economic growth on the other side of this pandemic, and that remains low taxes, a light regulatory touch, free trade, reined in government spending, and sound monetary policy (i.e., a sound dollar and low inflation).

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


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