The Fed Is Worried

The Fed Is Worried

It is clear that the Fed is much more worried than it has been about the strength of the economic recovery.

In January, March and April, the Fed’s Open Market Committee used identical language:

Although the pace of economic recovery is likely to be moderate for a time, the committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

In June, it backed off a bit:

The pace of economic recovery is likely to be moderate for a time.

Now it says:

The pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Michael Shaoul of Oscar Gruss & Son points out that virtually every change from the June statement to today’s handout “represents a downgrade of prior expectations.”

But he adds:

Since we hold the F.R.B. to be as good a contrary indicator as consumer or investment sentiment (anybody doubting this should read the F.O.M.C. minutes for the mid-2007 or late-2000 meetings) we are quite happy with this development, even though it will no doubt cause a redoubling of negative commentary.

Both of the previous examples of bad Fed forecasting that he points to were cases where it was overly optimistic when storm clouds were gathering. I wish he had pointed to a case or two in which the Fed was overly pessimistic.

For what it is worth, at the end of October 2007, when the Fed eased monetary policy for the second time in two months, it wrote:

Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

There was one dissent to today’s decision. Thomas Hoenig, the president of the Kansas City Fed, saw no need for the action taken because he “judges that the economy is recovering modestly, as projected.”

I hope he is right, but it is not reassuring to note that in October 2007, there was also one dissent from the decision to ease policy. It, too, came from Mr. Hoenig. In his view then, according to minutes of the Fed meeting:

Projections for the U.S. and global economies suggested that growth was likely to proceed at a reasonable pace over the outlook period.

The recession officially began in December. Real G.D.P. has yet to recover to the level of the third quarter of 2007. The Fed majority was too optimistic then, even if it was less optimistic than Mr. Hoenig.

Addendum, 5:30 p.m.: I see that the Fed’s concerns did not seem to have much effect on House Republicans, all but two of whom voted against the very modest stimulus bill that House Democrats passed today. If the Fed is right to be worried, then there is a lot to be said for easier fiscal policy until the threat has passed.

source: nytimes.com