Now in category: Business and Finance
Fed Report Trims Economic Outlook
WASHINGTON, Nov. 20 — Policy makers at the Federal Reserve expect the economy to keep expanding over the next year, but they have lowered their forecasts and are much more uncertain about the outlook than just four months ago, the central bank reported today.
At the start of an effort to describe its internal thinking more openly, the Fed unveiled a detailed forecast that summarizes the views as well as the disagreements among the Fed’s governors and regional bank presidents.
The new forecasts show much lower expectations of growth, and a much greater uncertainty about those expectations, than policy makers had as recently as June. The new forecasts range from 1.6 to 2.6 percent. In June, by contrast, the range was 2.5 to 3 percent.
“Most participants viewed the risks to their G.D.P. projections as weighted to the downside,” the central bank said in its summary of the most recent policy meeting, held on Oct. 31.
The stock market’s reaction to the Fed report today was initially negative, with the Dow Jones industrial average down 100 points on the day. But by the end of the session, the market indexes changed direction and closed with gains, as investors apparently saw prospects of further rate cuts.
The Fed’s new assessment, released along with minutes of the October meeting, show that it still sees only limited evidence that the meltdown in housing and subprime mortgages has damaged the broader economy.
The “central tendency” of policy makers’ individual forecasts calls for economic growth in 2008 of only 1.8 to 2.5 percent. Growth for the current year is expected to wind up at 2.4 to 2.5 percent.
As a group, Fed policy makers expect “subpar economic growth” over the next year. But they predict that unemployment will edge up only slightly, to as much as 5 percent by the next year, compared with about 4.7 percent today.
Policy makers are hedging their forecasts. They are saying they do not think the economy will slip into a recession, but admit that they could be wrong. For practical purposes, they do not want to cut rates until they see concrete evidence of that.
Fed officials have repeatedly signaled in recent weeks that they do not want to cut rates in December, having already lowered the benchmark Federal funds rate twice since September, bringing it to 4.5 percent on Oct. 31. But most Wall Street analysts have more pessimistic forecasts, which is why investors are betting that the Fed will indeed cut rates — if not in December, then early next year.
“I think what we’re really debating here is the timing,” said Stuart Hoffman, an economist at PNC Financial in Pittsburgh. “Whether or not it happens on Dec. 11, my guess is that by the March meeting, the Fed funds rate will be 4 percent.”
Mr. Hoffman noted that energy prices are likely to produce a big jump in the overall inflation rate in December, something that would make Fed officials reluctant about relaxing monetary policy. But there will be other data in the next month that could still sway the central bank.
Weak sales on Friday, the day after Thanksgiving and traditionally the start of the holiday shopping season, would be one important warning sign about slower consumer spending. A weak reading in the monthly survey of manufacturing executives could be a second. A third indicator will be the unemployment report for November, scheduled for Dec. 7.
Fed officials do not say what they view as the long-run “potential” growth rate of the economy, which is based on the rate of rising productivity and growth in the labor force. But most economists peg the underlying trend at somewhere from 2.5 to 3 percent, and the new report shows that almost all policy makers expect growth to be “below trend” until 2009.
Source: New York Times
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Article publication date: 20 Pluviôse Ray80 (21 Nov 2007)
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