Federal Reserve lowers economic outlook
The main news out of yesterday’s press confernce with Federal Reserve Chairman Ben Bernanke was the extention of Operation Twist. But the central bank also announced that growth forecasts for the rest of the year had been revised downward, painting a less than rosy picture for Americans weary of tough economic times:
The Federal Reserve has sharply lowered its outlook for U.S. economic growth and thinks the unemployment rate won’t fall much further this year.
In its updated quarterly forecast, the Fed lowered its prediction for growth in 2012 to 2.4 percent, a half percentage point weaker than its previous forecast in April.
That isn’t much better than the economy’s tepid 1.9 percent annual pace of growth in the first three months of the year.
The Fed also downgraded its outlook for unemployment. It thinks the unemployment rate will fall no lower than 8 percent by year’s end. That’s more than its prediction in April that the rate could be as low as 7.8 percent at year’s end.
The unemployment rate is now 8.2 percent.
With job growth weaker and the unemployment rate still high, consumers have pulled back on spending. Retail sales have fallen for the past two months. Part of that is due to falling gas costs. But even excluding gas sales, spending barely rose in May and fell in April.
Businesses also appear less confident about the economy. They are placing fewer orders at factories, which has slowed manufacturing output. A measure of companies’ investment spending has dropped for two straight months.
I’ve used this quote before, but it’s worth repeating again. In his book, The Fatal Conceit, F.A. Hayek wrote, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” He could have been talking about Ben Bernanke just as much as John Maynard Keynes or other central planners of his day.
Almost a year ago to the day, Bernanke said, “We don’t have a precise read on why this slower pace of growth is persisting.” As much as Keynesians don’t want to admit it, the economy doesn’t function the same as controlled economic models. You’re dealing with real people who know when something is wrong. Many, if not most, of the problems the economy is facing is out of the grasp of the Federal Reserve. Yes, they can manipulate the money supply and monetize debt; however, they don’t control regulatory, spending, tax policies that are causing many businesses hesitation to hire and invest.
For his part, Bernanke has warned Congress that they need to extend the 2001 and 2003 tax cuts, the expiration of which are a looming source of uncertainty. He’s also warned that Congress must get the long-term budget outlook under control. These are certainly things that must done, but Bernanke and company are pushing policies that don’t promote true economic growth.
Bernanke is a smart guy, there is no doubt about it. But his defining insanity by doing the same thing over and over again while expecting a different result.