Reality check for US Fed forecasts

WASHINGTON: The US economy, to mix two Federal Reserve catch phrases, may be disappointingly slow for an extended period.The central bank will release updated economic forecasts on Tuesday as part of the minutes from its latest policy-setting meeting, including a first stab at estimating growth, inflation and unemployment levels for 2013. At first blush, the forecasts would seem destined to take a back seat to the section detailing the Fed’s discussions around launching its new $600 billion bond-buying program. But this has been discussed, debated, denounced and defended so extensively in recent weeks that some investors have begun to tire of it.

The big questions now are whether the Fed will still buy the full $600 billion if the economy strengthens — or extend the program if it does not. The forecasts provide the clearest insight into how Fed officials see the recovery playing out.The figures are expected to show Fed officials have sharply downgraded their 2011 assessment since June, putting it more in line with private economists’ predictions for sluggish growth. The most recent set of figures had 2011 GDP marching ahead at a 3.5 percent to 4.2 percent clip, while economists polled by Reuters predicted just a 2.3 percent rate.“The question is how low will they go?” said Harm Bandholz, US economist with UniCredit in New York.Money and politics: The forecasts for the following two years may be even more telling. The longer the time horizon, the harder it is to predict with much accuracy. But if Fed officials take a sharp knife to 2012 estimates and predict a slow grind in 2013, it would suggest that at least some of them think the economy will need support well after this easing program expires in June 2011.

For President Barack Obama, gloomy forecasts through 2013 would be particularly unpleasant reading as the 2012 presidential election draws closer. His Democratic Party suffered heavy losses in congressional elections earlier this month, largely because of voter anger over the weak economy.Fed Chairman Ben Bernanke made it clear he wouldn’t mind a little more help from the fiscal side. He said in a speech in Frankfurt on Friday that “there are limits to what can be achieved by the central bank alone” and a fiscal program could complement the Fed’s efforts. Big Republican midterm election wins in Congress make it less likely that any substantial government spending programme would be forthcoming.Goldman Sachs economist Jan Hatzius pointed out that Bernanke chose his words carefully and did not clearly specify the type of fiscal support he would prefer, “but this is nevertheless a strong hint that Fed officials would like to see accommodative fiscal policies in the near term.” Republicans might be more inclined if the fiscal program took the form of tax cuts. But with most Democrats strongly opposed to extending Bush-era tax cuts for the wealthiest households, even that may be a tough sell.

A few hours before the Fed’s minutes are released on Tuesday, the central bank will get a couple of reminders why it launched the latest bond-buying program in the first place.Revised figures on third-quarter growth are expected to show the economy plodded along at a 2.4 percent pace, slightly better than the originally reported 2 percent but still well short of what is needed to heal the labor market quickly. If growth stays around that level for another year or more, as many economists predict, it will put pressure on the Fed to do more to help bring down the jobless rate.Given the backlash against the current bond-buying campaign, another round probably would not go over well with important U.S. trading partners such as Germany and China. Bernanke offered yet another defense of the policy in his Frankfurt speech, but also gave an unusually blunt warning that other countries must cooperate and do their part to rebalance global growth. If they don’t, it could end badly for all. “Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today – Dailytimes