BackUS Fed estimates of GDP growth now much lower than when tapering began
The trajectory of Fed's GDP estimates shows it is not as optimistic about growth as it was when tapering started
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The chart shows the projections for economic growth, unemployment and consumer-price inflation for the US economy, estimated by the US Federal Reserve’s board of governors, since a year ago. Note that their estimates of gross domestic product (GDP) growth, for both 2014 and 2015, are now much lower. Indeed, they have been revised lower at every federal open market committee meeting.
But, contrary to what can be expected from lower GDP growth, the unemployment estimates are also lower than a year ago. The explanation usually given for the low unemployment figure is that many people have given up looking for work and have dropped out of the workforce. Inflation estimates are more or less around the same level as in September 2013.
The Fed decided to start tapering its bond purchases at its December 2013 meeting. At that time, its projection for GDP growth was 2.8-3.2% for 2014 and 3-3.4% for 2015. At its meeting last Wednesday, the projections for 2014 growth were at 2-2.2% and for 2015 it was 2.6-3%.
Why then should there be any disquiet about the Fed trying to bring forward its date for rate increases? Could it be the Fed is looking to 2016? But its GDP growth projection for 2016 is at 2.6-2.9%, lower than in 2015. Its inflation projections are below its 2% target. And Janet Yellen indicated at the press conference that she believes there’s considerable slack in the jobs market and pointed to tepid wage growth, which means she’s not taking the improvement in the unemployment rate at face value.
Simply put, the trajectory of the Fed’s GDP estimates shows it is not as optimistic about growth as it was when tapering started. The questions that arise are: 1) Do the estimates show a chronic tendency towards optimism by the Fed as far as GDP growth is concerned? 2) Is the tapering responsible for the lower-than-estimated GDP growth? 3) Do the lower growth projections not mean that rate rises should be even further in the future?
And the biggest question, of course, is: after six years of holding the Fed funds rate at zero, is this the best the US economy can do?
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