Federal Reserve Forecasts Future Growth
Kurt Brouwer November 27th, 2007
James Pethokoukis at U.S. News’ Capital Commerce Blog posted this on the Federal Reserve’s new system of forecasting future growth [emphasis added below]:
Bernanke Puts a Low Speed Limit on Growth (Capital Commerce Blog, November 20, 2007, James Pethokoukis)
The Federal Reserve released its first quarterly economic forecast today, projecting economic growth, unemployment, and inflation for the next three years.
‘Here are the Fed’s numbers—economic growth: 1.8 to 2.5 percent for 2008, 2.3 to 2.7 percent for 2009, and 2.5 to 2.6 percent for 2010; unemployment: 4.8 to 4.9 percent for 2008, 4.8 to 4.9 percent for 2009, and 4.7 to 4.9 percent for 2010; core inflation: 1.7 to 1.9 percent for 2008, 1.7 to 1.9 percent for 2009, and 1.6 to 1.9 percent for 2010.
My take: While that may be a great forecast for bond investors—unspectacular growth with low inflation—most Americans should be less than thrilled by it. Here is the key sentence from the report: “Economic activity was projected to expand at a pace broadly in line with participants’ estimates of the rate of expansion of the economy’s productive potential in 2009 and to continue at much the same pace in 2010.”
In other words, growth at 3 percent or more is inflationary. Yuck. Compare those numbers with the 1983-1990 Reagan boom when annual growth in gross domestic product averaged 4.1 percent. The Clinton boom, too, was right around 4 percent. If Bernanke and company are right, that’s all the more reason for America to adopt policies to make us more innovative and productive so the economy can grow faster than the low-ball Bernanke speed limit…’
Pethokoukis nails the point that we need to emphasize policies that will encourage future economic growth. We have benefited from solid financial growth for the past 25 years and it is imperative that we continue the policies that brought us that growth. We also have to avoid those who call for protectionism, higher tariffs and higher income taxes. Tariffs and income tax rates are falling around the globe and we have to remain competitive in both areas.
He also points to what is, I believe, an error in the Fed’s thinking. That is, GDP growth above 3% would be inflationary. I don’t think that is true and I hope they amend that policy because economic growth of 3% is eminently achievable without high inflation in my opinion.
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