Sunday, June 19, 2016

Message from the Fed: ‘This is as good as it’s going to get’

federal reserve
At the crux of the St. Louis Fed announcement Friday that it is changing its method of forecasting was a dismal acknowledgement — the economy essentially has come as far as it’s going to go for the next several years.
The conclusion comes via a wonky slog through issues and terminology (“regime change” anyone?) that only an avid Fed follower could love. But a paper released by James Bullard, who runs the St. Louis Fed, was clear in asserting that present conditions are likely to persist for at least the next 2 ½ years, presenting little need for the central bank to raise rates more than a quarter point.

That means economic growth around 2 percent — though without a recession — limited productivity gains and the associated wage hikes, and muted inflation. On its own, that forecast wouldn’t be terribly shocking, if it hadn’t come from a leading member of a central bank that only a few weeks ago had been talking up rate hikes and economic growth with a strong sense of certainty.
“They’ve put themselves in an awkward position,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “It’s been a very weak economy, and interest rates are already extraordinarily low. … This is as good as it’s going to get.”
There are multiple caveats to attach to Bullard’s report, the most important being that he was speaking only for the St. Louis Fed and not the broader central bank and its Federal Open Market Committee, which sets monetary policy. But with Wednesday’s FOMC decision not only not to raise rates in June but also to scale back its economic projections and the path of rates ahead, the timing is at least important.

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