Federal Reserve Downgrades US Economic Forecast

The Fed released its always anticipated minutes from previous meetings. Overall, the Fed downgraded its economic projections for 2011 across the board. Here are some of the highlights:

  • Revises down 2010 GDP--now sees 2.5% vs 3.3% expected back in June
  • Sees 2011 GDP growth at 3.0-3.6% vs previous estimate of 3.9%
  • Holds 2012 GDP growth estimate flat at between 3.6%-4.5%
  • Unemployment rate expected at 8.9%-9.1%, previous estimate 8.5%
  • 2011 unemployment seen at 7.7%-8.2% up from 7.3%
  • 2011 Core inflation (ex what you need to live) is expected at 0.9%-1.6% which is flat with previous estimate 

The Fed was finally forced to admit economic reality. The economy has been permanently crippled by the financial crisis and money printing does nothing to increases jobs. I still think the Fed is too optimistic about the US economy, especially unemployment. We discussed the issue of unemployment previously. But lets remember that the US economy has to create 100,000 jobs per month just to keep the rate steady. This will be much more difficult considering states and municipalities are laying off workers. The SF Fed estimated in order to reduce the unemployment rate to 8.0% by June 2012, the US economy would have to create 200,000 jobs per month starting in October 2010. Quite impossible! Indeed, according to the Fed minutes some members expect unemployment to rise in 2011 because of the weak economy.

The most important part of the Fed minutes was that it showed a growing rift between FOMC members regarding money printing. From the minutes:
"Some participants noted concerns that additional expansion of the Federal Reserve's balance sheet could put unwanted downward pressure on the dollar's value in foreign exchange markets." Several officials saw a risk the move could "cause an undesirably large increase in inflation."
We have discussed before that while it seems Zimbabwe Ben is in complete control, there is more disagreement between FOMC members than meets the eye and it is not just Hoenig. I have read reports which suggest numerous FOMC members were reluctant about QE 2, but did not openly voted against the Chairman (sounds like some Communist central committee where everyone is in fear). The 2011 crop of FOMC members should make it harder for Ben. Some, like Plosser and Fisher have openly said QE is a failed policy that should be stopped. Even the usually loyal Warsh has had some harsh comments about continued money printing in an op-ed in the WSJ.

The pressure is increasing for Zimbabwe Ben. But at least he knows he has one loyal friend in Congressman Barney Frank.

Black Swan Insights


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