The Fed Thinks the Economy is Just Fine – Or Does It?

By at 20 March, 2024, 4:44 pm

by Raymond J. Keating –

Based on the latest statement from the Federal Open Market Committee, the Fed seems to think that the economy is just ducky.

The FOMC statement opens: “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”

Really? Well, I certainly hope the Fed is right.

Of course, the Fed often is off base – sometimes way off base – in its take on where the economy is and where it’s headed.

But the Fed also said, “The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.” Oh. Alright.

No Rate Change

The Fed left its federal funds interest rate target unchanged at 5.25 percent to 5.5 percent.

Perhaps there’s some clarity in the Fed’s just-released economic projections. There are two sets of projections in this release that warrant attention.

By the way, while media reports tend to focus on the median projections, I prefer the range of projections offered by the Federal Reserve Board members and Federal Reserve Bank presidents, as that gets at the uncertainty underlying such estimates, and that Fed officials can, and usually do, vary widely in their outlooks.

GDP Projections

Let’s first consider the projections of real GDP growth. For those of us who refuse to accept the prevailing diminished expectations when it comes to economic growth, the Fed’s range of forecasts is rather depressing.

For 2024, the range of projections regarding real GDP growth are 1.3 percent to 2.7 percent, followed by 1.7 percent to 2.5 percent in both 2025 and 2026, and 1.6 percent to 2.5 percent over the long range. As a reminder, real GDP growth averaged 3.2 percent since 1950. So, no one should get excited about these Fed growth expectations.

Inflation Projections

Second, there are the projections on inflation. The Fed uses PCE Index inflation, and the range of projections for 2024 is 2.2 percent to 2.9 percent, 2.0 percent to 2.5 percent in 2025, and 2.0 percent to 2.3 percent in 2026 – and then 2.0 percent thereafter.

Contrary to the GDP projections, these inflation expectations seem a tad rosy, considering where we’ve been on inflation. But I’m a hopeful optimist, so, let’s hope these inflation projections turn out to be correct.

What About Policies?

A final point needs to be raised, however.

With anti-growth tax, regulatory, trade and government spending policies currently prevailing; the Fed’s actions ranking as confused on how to fight inflation; and a potentially ugly election year, the more pessimistic ends of the Fed’s projections perhaps warrant attention.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.


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