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Even More Fed Up With the Fed

By    |   Friday, 12 August 2011 08:01 AM

The Federal Reserve Bank has little credibility in reserve.

More than three months ago, my Moneynews piece entitled, “Fed Up With The Fed,”  described the ineffective prognostications and policy methodology employed by The Federal Reserve Bank.

The graphic and two paragraphs below (in bold italics) are from that article.

Time                Real GDP(Annual Growth)             Inflation(Annual)           Unemployment

2011                             3%                                       2.5%                                  8.8%
2012 election               4%                                       1.5%                                 Under 8%
Long Term                  2.5%                                     Under 2%                         5.5%

The 2012 election data is unrealistic, while those for the long term defy economic gravity.

The former anticipates real GDP, unemployment, and inflation to improve by one percentage point each (highly suspect). The latter suggests a large employment increase accompanied by lower economic growth and less inflation. At best, this represents a marked decline in labor productivity: an ominous scenario, indeed.

Each quarter, The Federal Reserve Bank publishes macroeconomic forecasts for the current year and the following year or two.  Recently, these estimates, along with subsequent revisions downward, have been consistently overstated.  

The 2011 forecast above, made roughly 3 months ago, highlights inadequacies of the  Federal Reserve Bank

The United States Bureau of Economic Statistics indicates that annual real GDP growth (seasonally adjusted) in 2011, was only 0.4% and 1.3% in the first and second quarters, respectively.

Moreover, economic activity for the balance of 2011 does not  appear robust.

The Federal Open Market Committee (FOMC) of The Federal Reserve Bank issued the following on August 9, 2011:

“Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.  [emphasis added] Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.”

“The Committee now expects a somewhat slower pace [emphasis added] of recovery over coming quarters than it did at the time of the previous meeting [.]”    “Moreover, downside risks to the economic outlook have increased.” [emphasis added]

“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  [emphasis added] The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. [emphasis added] The Committee also will maintain its existing policy of reinvesting principal [emphasis added] payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

In essence, the Federal Reserve will maintain the current expansionary monetary policy for an additional two years, at least,  to increase economic activity.  The macroeconomic policy tools it has elected to utilize are: interest rates and money supply.

It will keep the federal funds rate (interest rate financial institutions pay each other to borrow funds) between 0% and 0.25%.  In addition, it will maintain the money supply at current levels by repurchasing the maturing United States Treasury securities that it currently owns (I.e., reinvesting principle).

Three months ago, the Federal Reserve Bank predicted a real GDP growth rate of 3%.  The magnitude of this error, in light of its recent FOMC prognostication, severely diminishes its credibility.

Moreover, it predicted an unemployment rate of 8.8% for 2011.  As of July, 2011, unemployment reached 9.1%, according to the United States Bureau of labor Statistics.  Unemployment will probably experience further increases this year and next.

The following is a quote from an article of mine, published nearly 2 years ago, on August 14, 2009:

“It would not be surprising if unemployment remains in double digits [emphasis added] during the 2012 presidential campaign.”

The likely scenario for the remainder of 2011: 

Anemic economic activity, rising unemployment, and increased inflationary pressures.

This portends a further weakening in equities and a strengthening of gold. 

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The Federal Reserve Bank has little credibility in reserve. Morethan three months ago,my Moneynews piece entitled, Fed Up WithTheFed, described the ineffective prognostications and policy methodology employed by The Federal Reserve Bank. The graphic and two paragraphs...
Friday, 12 August 2011 08:01 AM
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