Washington Post: Fed Forecasts Not Accurate

Friday, 21 Jun 2013 01:11 PM

By Michael Kling

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The Federal Reserve is saying when it expects to shrink its quantitative easing based on its economic projections. But the Fed is horrible at making predictions. It's wrong all the time, reports The Washington Post.

Every two-year forecast the Fed made in June going back to 2009 was overly optimistic, according to the Post. It continually trimmed growth forecasts over time as the time period being forecasted approached.

For instance in 2009, it predicted 4.2 percent growth for 2011.
It turned out to be 2.4 percent.

In 2010, it forecast 4 percent growth for 2012. It was 2 percent.

Its latest forecast: the economy will grow between 2.3 and 2.6 percent in the fourth quarter in real terms, then 3 to 3.5 percent in 2014 and 2.9 percent to 3.6 percent in 2015. Unemployment will fall to 5.8 to 6.2 percent in 2015.

Even if the economy achieved that 5.8 percent rate, it's far from full employment, and eight years after the recession started in December 2007.

"But the bigger reason not to get too excited is that the Fed is wrong all the time," states the Post.

The stock market tanked because the investors expect the Fed to begin winding down QE and increasing rates as the economy improves, notes Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, in his blog. But based on past experience, the Fed's forecast will be wrong and it will not end QE as soon as it expects.

"So why all the angst?" he asks.

The housing market is improving, consumers’ and businesses’ balance sheets are recovering, and businesses are ready to invest in new projects.

"The Fed is feeling better about the economy because they perceive it to be on steadier footing than at any time since the crash," Bernstein says. "But as I see it, there’s an important difference between steady-footing and actually getting up and running ahead."

The Fed's forecasts have been repeatedly overly optimistic since the recession ended.

"It’s true that the Fed has to look ahead, to see around the next economic corner in ways that gadflies like I do not," Bernstein notes. "But if every forecast I made proved to be too optimistic, and for all its improvement, the economy was still a slog for millions of un- and underemployed workers whose paychecks have barely kept pace with even weak inflation…well, I think I'd be a hefty tad more cautious about changing my position as per that punch bowl."

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