Tags: Fed | stocks | plunge | economy

New York Times: Federal Reserve Is Too Optimistic

Friday, 21 Jun 2013 11:01 AM

By Michael Kling

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The Federal Reserve is too optimistic, says The New York Times.

Just six weeks ago, the Fed was talking about "downside risks to the economic outlook," notes the Times editorial board. Now it says those risks have fallen since last fall.
The Fed now expects economic growth to push the unemployment rate down to 7 percent by mid-2014. That's when it will start winding down its quantitative easing bond buying programs.

Why the turnabout to greater optimism?

Perhaps the Fed is publicizing the coming end of QE to deflate asset bubbles that have grown during loose monetary times, the newspaper hypothesizes. Judging from the stock market drop, it seems to have succeeded.

The Standard & Poor's 500 Index plunged 2.5 percent yesterday as global equities fell after the Fed indicated it may start paring stimulus measures as soon as September, Bloomberg News reported.

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"On the other hand, the Fed’s underlying optimism is hard to fathom. There haven’t been any compelling improvements in the economy since late last year."

The Times points to recent economic numbers. Economic growth slowed from 2.1 percent in the last half of 2012 to 1.8 percent in the first quarter of 2013. Inflation is down to an annual 1.05 percent pace.

"Given these trends, the Fed could find that its latest policy statements have boxed it into positions that could be harmful to the economy."

The Fed says it will start ending QE when unemployment, now at 7.6 percent, falls to 7 percent.

A 7 percent unemployment rate means 11 million officially unemployed plus millions forced to work part time. It would not be low enough to push up wages. Consumer demand and business confidence would remain weak.

Congress must assume its responsibility to boost growth, but Republicans are blocking most attempts to help the economy and create jobs, the Times charges.

"We wish we could share the Fed’s optimism, but until monetary policy and fiscal policy, and politics, in general, are more consistent and functional, the outlook just doesn’t look all that bright."

Jared Bernstein, a former Obama administration economist, agrees that the Fed is too optimistic. And this isn't the first time, he writes in an article for the Huffington Post.

"Without exception, they've had to dial back every one of their forecasts."

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