Wednesday, June 20, 2012

Federal Reserve Slashes Economic Expectations.

Do you really want four more years of this?
So the best case forecast is 2.4% growth and 8.0% unemployment. Given what we’ve seen so far — and what’s happening in Europe — 1.9% GDP growth and 8.2% unemployment seems more likely. JPMorgan on the Fed’s decision today:
At its meeting today the FOMC extended Operation Twist through the end of the year, and delivered a statement that was a little more downbeat on the outlook. The size the Twist 2.0 is $267 billion, which is probably more than expected, though the purchases will remain limited to longer-dated Treasuries and will not expand into mortgages. The statement marked down the outlook to note that growth is expected to pick up “very gradually” (previously just “gradually”) and that the unemployment rate would decline “only slowly” (previously “slowly”).

The notable, but expected, change to the description of current conditions was to observe that growth in employment has slowed. The guidance on the funds rate continues to point to late 2014 as the earliest expected date of lift-off, but there was a change in guidance regarding the balance sheet, to now note that the Fed is “prepared to take further action,” which presumably represents a bias toward more asset purchases if conditions deteriorate. Lacker dissented again, though this time against Twist, not against the rate guidance.

Overall today’s meeting did not deliver too much in the way of surprises, which is in an odd way somewhat of a surprise given how widely-dispersed expectations were ahead of today’s meeting, ranging from no action to an outright expansion of the balance sheet. Instead, the Fed played it safe, taking out a little more insurance against downside growth risks, while positioning themselves to do more if Europe deteriorates or the labor market fails to pick up.
In today’s press conference, Fed chairman Ben Bernanke admitted the Fed has continually been overly optimistic in its economic forecasts.


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