The Federal Reserve View: Such A Pretty Picture

The Federal Reserve raised its policy rate of interest by 0.50 percent on Wednesday, December 14, 2022, to the range of 4 1/4 percent to 4 1/2 percent.

The Fed’s view of the future:

“Recent indicators point to modest growth in spending and production.”

“Jobs gains have been robust in recent months, and the unemployment rate has remained low.”

“Inflation remains elevated, reflecting supply and demand imbalances….”

Additional policy support:

“the (Federal Open Market) Committee will continue reducing its holding of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May.”

The Future Economic Performance

And, how does the Federal Reserve translate these words into numbers?

Well, the economic projections of the Fed are as follows.

The fourth quarter-over-fourth quarter projections for 2022 show that the Fed expects real GDP growth to be 0.5 percent.

The Fed expects real economic growth in 2023 to duplicate this rise.

Growth is to remain modest.

But, the pickup is not expected to be that much better.

Economic growth rises to 1.6 percent in 2024 and then turns in a 1.8 percent performance in 2025.

The longer-run?

Well, the Federal Reserve projections put the expectation for the longer-run growth to remain at 1.8 percent.

Note that this is a dimmer picture than the performance of the U.S. economy in the 2010s when the compound annual growth rate for the period of expansion following the Great Recession was about 2.3 percent.

The was lots of concern back then that the economy was growing way too slow.

Well, the Fed is looking out, perhaps for five years or so, and painting a picture of economic growth that is slower than was experienced in the 2010s.

Not too pretty.

But, unemployment does not turn in too bad of a performance in these projections.

In 2022, the unemployment rate is reported to be around 3.7 percent, near its historical low for the past fifty years or so.

Fed projections have the unemployment rate rising to 4.6 percent in the next two years before falling to 4.5 percent in 2025.

For the longer run, the unemployment rate gets back down to 4.0 percent. Not too bad of a picture and right on the Fed’s goal.

So, in the next five years or so, the economic growth of the U.S. economy is going to be relatively pathetic, but unemployment is not expected to be too bad, not too far above recent historical lows.

What About Inflation?

But, what about inflation?

The Fed’s target for inflation is the PCE (Personal Consumption Expenditures) measure of consumer prices.

In the longer run, the Fed is projecting a 2.0 percent rate of inflation, right on target.

In 2025, the Fed will be almost there with a 2.1 percent rate of PCE inflation.

This measure for inflation in 2022 comes in at 5.6 percent. This is, of course, a little lower than the rate of inflation captured in the Consumer Price Index, which showed up to be 7.1 percent year-over-year, in November.

So, this performance will tie up the Fed’s goals.

Good job Fed!

Looks Easy!

Wow! The numbers all fit into the Fed’s pattern like a dream.

If the Fed pulls this off, then Chairman Jerome Powell should get a Nobel Prize and the Federal Reserve Board should go down in history as one of the best Boards in history.

The only complaint comes in terms of economic growth.

The feeling here is that the Fed is erring on the side of slower economic growth so as to give it a better chance to achieve the inflation goal of 2.0 percent.

Well, good enough.

The view pictured would sure be great if achievable, but, unfortunately, I have my doubts.

It appears as if the investors in the stock market also have doubts.

And, there is more.

But, the Fed gives us a picture of an economy that is smoothly moving into a new era, one where price inflation is down at 2.0 percent and the employment level of the economy is right around full employment.

If only it were so easy.

The Stock Market

The stock market posted good gains on both Monday and Tuesday of this week.

The Standard & Poor’s 500 Stock Index, today, had risen over 30 more points before the news from the Federal Reserve came out.

By 3.30 PM, the S&P 500 had recorded a 33-point loss for the day.

The concern is the underlying feeling that the Fed will continue to raise its policy rate of interest for a longer period of time than investors had been anticipating.

Mr. Powell and the other members of the FOMC felt it was important to reiterate that “The Committee is strongly committed to returning inflation to its 2 percent objective.”

The implication: we are not raising the rate by as much as we have since March, but we still intend to keep raising the rate until we get the inflation rate back to 2.0 percent.

My concerns, however, are elsewhere.

The Fed’s projections point to a very benign rise in economic activity while the inflation rate drops rather precipitously.

There are two problems I see with this.

First, I don’t see the economy acting so benignly. The economy is all screwed up. Disequilibrium exists almost everywhere.

The Fed alludes to this in its picture of the economy. The Fed says that there are “supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

But, this is just the surface of the problem.

Just taking the financial sector, the imbalances the Fed created are just beginning to show up in the bankruptcy of FTX, and the major losses are being recorded in the area of “blank check companies.” Others will follow.

The Federal government has posted its largest-ever monthly deficit. And, there is more to come.

Furthermore, speaking about all the money and debt that now exists, the Fed faces the dilemma of the asset price bubble it has created. Things are not good.

The placid report of the Federal Open Market Committee only adds to the unease of the investment community. The volatility will continue in the financial markets.

The disruption in the economy is only going to increase in 2023, especially if the leadership of the Federal Reserve continues in the way it has.