Watch the Fed get more pessimistic over time

June 22, 2012

How fast will the U.S. economy grow in 2012? The Federal Reserve has been trying to predict this question for two years, and as this graph from Jared Bernstein shows, they've been getting steadily more pessimistic over time:


Getting gloomy.

If you'd asked the Fed's crystal ball gazers back in 2010, they would have predicted 4 percent growth for 2012. A solid recovery! If you had asked them in 2011, they would have said, eh, would you settle for 3.5 percent? Good, but not quite as good. And if you had asked them this year? The Fed's forecasters keep revising their predictions down. We're now at 2.15 percent. As Bernstein notes, economic forecasters are only slowly coming around to the idea that the U.S. economy will take a long time to recover from the collapse in housing wealth.

Brad DeLong, by contrast, is puzzled by why the Fed isn't more alarmed by this graph: "You would think that that degree of deterioration in the growth forecast would cause somebody to press the big red button, no?"

Or perhaps the Fed is alarmed. One possibility, as Ezra mentioned, is that Fed Chairman Ben Bernanke just doesn't want to admit that he's out of ammo: "To put it another way, a scary interpretation of Bernanke’s position is that he doesn’t believe the Fed could do much more to help the economy, but he doesn’t want the market to know that, and so he keeps not doing more but telling the markets he could do more if he wanted to."

Another theory, offered up by the Wall Street Journal's Jon Hilsenrath, is that Bernanke is alarmed by the scary chart above, and he genuinely believes that the Fed has more tools to boost the economy and stop further deterioration. But he's slowly trying to bring other Fed officials around to his view. "[Bernanke's moves]," Hilsenrath notes, "have tended to be very deliberate and have unfolded in step-by-step fashion over months, not days. One reason is that he has had to build consensus on a policy-making committee with sharply divergent views. Another is that he appears to be trying to gather information and calibrate his response."

Meanwhile, it's worth noting that at his news conference on Wednesday, Bernanke did ask Congress to pitch in: "Monetary policy is not a panacea," he told reporters. "Monetary policy by itself is not going to solve our economic problems. We welcome help and support from any other part of the government, from other economic policy makers. Collaboration would be great." Trouble is, no one thinks Congress is going to do anything to bolster the economy between now and the election, so everyone's focused on guessing whether Bernanke has any tools left to stop the deterioration in the chart above.

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Sarah Kliff · June 22, 2012