Federal Reserve Forecasts Stagflation

By at 16 March, 2022, 4:36 pm

by Raymond J. Keating –

The headline from the latest FOMC statement is that the Federal Reserve has decided to up federal funds rate from the targeted range of 0 percent to ¼ percent to the range of ¼ percent to ½ percent. The FOMC statement also included that the Fed “anticipates that ongoing increases in the target range will be appropriate.”

That’s anything but earth shattering, and it was overwhelmingly expected.

Interestingly, in terms of actually reining in its long-running, unprecedented loose money regime, the Fed only said that “the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.” Hmmm.

Anyway, more troubling was the accompanying Fed economic projections. In that analysis, the move in forecasts was in the wrong direction on both growth and inflation.

When it comes to reporting on these projections, the media tends to report the median estimates. But it’s more informative to note the range of projections offered by the Federal Reserve Board members and Federal Reserve Bank presidents, as this better reflects varied Fed thinking, as well as the risks and uncertainties that come with such estimates of where the economy might be headed.

Also, in this economist’s humble view, predicting where the economy will be headed over the coming year is fraught with doubt, therefore, projections beyond the coming year amount to little more than guesswork.

That being the case, for this year, 2022, the range of Fed estimates on real GDP growth are 2.1 percent to 3.3 percent. That’s down markedly from the previous estimates for 2022 which stood at 3.2 percent to 4.6 percent.

Regarding inflation, the Fed zeroes in on PCE inflation, which has been running at better than 6 percent over the past year. The range of Fed estimates for PCE inflation in 2022 range from 3.7 percent to 5.5 percent The previous projection came in at 2.0 percent to 3.2 percent.

But whether you think the Fed is being optimistic or not regarding this year’s inflation rate, the shift in expectations, again, are in the wrong direction. And when you combine a real growth rate range of 2.1 percent to 3.3 percent, with inflation between 3.7 percent and 5.5 percent, that’s stagflation – not as bad as the late 1970s and very early 1980s, but a real degree of stagflation, nonetheless, that is, under-performing growth combined with hot inflation.

One thing to keep in mind with Fed forecasts is that it’s easy to make the case that this is a best-case scenario, since Fed appointees assume that their own policymaking is correct.

Unfortunately, given the many issues being confronted, including ongoing supply chain challenges, tight labor markets, Russia’s war on Ukraine, misguided tax, regulatory and trade policies, and the Fed still being rather casual about reining in the money supply, uncertainty reigns for entrepreneurs, businesses, investors and workers. Getting policy right on taxes, regulation, trade and the money supply would help, but it seems few of our policy leaders are interested.

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


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