On November 23, the Federal Reserve’s Open Market
Committee
released the
minutes from its November 2-3
meeting.
Before getting into the important data regarding the FOMC
members’ updated forecasts for future economic activity, it should
be pointed out that the FOMC staff also have an economic forecast.
While the specifics of the staff forecast are not in the minutes,
they do mention that “the staff revised up its forecast for
economic activity in 2011 and 2012.” But note the caveats to this
optimism: “the November forecast was conditioned on lower long-term
interest rates, higher stock prices, and a lower foreign exchange
value of the dollar than was the staff’s previous
forecast.”
Perhaps just to tell the FOMC staff what the markets think
of their assumptions, Tuesday gave us much lower stock prices and a
much higher foreign exchange value of the dollar, with the USD
settling at a 2-month high versus the Euro, with that
currency-in-turmoil worth less than $1.34.
Turning to the people whose votes count, the Federal
Reserve Board Governors gave new projections on GDP growth,
unemployment, and inflation, with their last predictions having
been made for the June FOMC meeting.
The results are dramatic in the normally boring world of
the Fed: All of the participants’ projections for GDP growth for
2010 (which we obviously have almost all the data for already) were
between 2.3% and 2.5%, whereas in June, the predictions ranged from
2.9% to 3.8%.
Looking to the future rather than the past, the “central
tendency” of GDP projections for 2011 (which removes the three
lowest and three highest predictions) fell from a range of
3.5%-4.2% to a range of 3.0%-3.6%, a drop of about ½% of GDP. With
GDP around $15 trillion, we’re talking about $75 billion less in
economic activity, or about $250 for every man, woman, and child in
the United States. This is a huge change for just one year
from now. Furthermore, since GDP growth is then compounded, this
basically means we’ll be much poorer every year for the foreseeable
future than FOMC participants had expected.
Though the central tendency for 2012 was little changed,
the range of guesses fell from 2.8%-5.0% to 2.6%-4.7%.
More importantly, in terms of politics, was the stunning
jump in FOMC members’ predictions of future unemployment: Again, we
know this year’s data, so the key aspect of the new 9.5%-9.7% range
is that it shows the FOMC having been too optimistic in the past,
with the June prediction being 9.2%-9.5%.
But the real story is in the updated forecasts for 2011
and 2012. The new central tendency for 2011 is 8.9%-9.1% versus a
June prediction of 8.3% to 8.7%. Using the midpoint of the ranges,
the new forecast is a full ½% higher than just 5 months earlier.
The 2012 numbers are even worse, with a new range of 7.7% to 8.2%,
up from 7.1% to 7.5%, an increase of 0.65% from midpoint to
midpoint.
The first factor listed in the minutes as to why
participants thought growth would be slower than previously
expected was “a high degree of caution exhibited by consumers and
businesses.” And why wouldn’t we be cautious with a government that
has gone from wanting to control or destroy private industries from
cars to health insurance to banking, to looking utterly
incompetent, confused, and ineffective in everything from tax
policy to negotiating free trade agreements? There’s no way to know
what the next shoe will be to drop and therefore little incentive
to take entrepreneurial risk.
The minutes also show disagreement about the value and
risks of “QE2,” the Fed’s aggressive Treasury Security purchasing
program. Some members thought that the program would help the
economy by keeping long-term interest rates low and perhaps by
preventing disinflation or deflation. “Some participants, however,
anticipated that additional purchases of longer-term securities
would have only a limited effect on the pace of the recovery; they
judged that the economy’s slow growth largely reflected the effects
of factors that were not likely to respond to additional monetary
policy stimulus…” They also noted risks of debasing the value of
the dollar and causing “an undesirably large increase in
inflation.”
In other words, the Federal Reserve, which is supposed to
be a stabilizing buffer against the chaos of the fiscal policies of
the elected branches of government, is in the view of even some of
its own Governors potentially adding to rather than dampening our
current economic turmoil.
The FOMC’s new projections, if accurate, could spell
disaster for Democrats in 2012. As James Carville famously quipped,
“it’s the economy, stupid.” Indeed it is.
While the Fed’s new forecasts might gladden the heart of
someone who would love to see Barack Obama be a one-term president,
we must not forget the huge cost to our nation of millions of
people kept unemployed by the ultra-Keynesian policies being
implemented by the current administration and Obama’s willing
accomplice, “Helicopter Ben” Bernanke. These policies are all the
more reprehensible because Bernanke is an economic historian and
the lessons of history are replete with the consistent and utter
failure of Keynesian economics.
To the extent that Democrats in Congress believe, as
President Obama and Nancy Pelosi have both suggested, that their
2010 electoral drubbing was due to simply not explaining their
actions well enough, their echo chamber will cause them to ignore
the screaming, pleading voices of an American citizenry desperate
for economic stability. We should all hope that the Fed’s new
projections are overly pessimistic; but should they be accurate (or
not pessimistic enough) we should all endeavor to ensure that those
responsible for economic failure pay a political price when the
votes are counted two years from now.
