The Federal Reserve's bullish economic outlook for the year cheered investors initially when it was released Tuesday, but it appears to be too rosy, several economists said this week.
Central bank policymakers predict a big pickup in economic growth with tame inflation and slowly rising interest rates, according to their semiannual monetary report to Congress, which was delivered Tuesday by Fed Chairman Alan Greenspan.
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"Chairman Greenspan donned his Goldilocks outfit," in presenting the report, Ethan Harris, chief U.S. economist for Lehman Brothers Global Economics wrote to clients yesterday. "We think he is being a bit overly optimistic."
The Fed's forecast matters because it reflects the expectations of most of the central bank's policymakers as they make decisions on interest rates in coming months, said Peter Morici, a professor at University of Maryland's business school.
The report's "forecast is really too optimistic," Morici said. "The real danger is that they overreact and raise interest rates too much and too fast, a mistake they have made in the past."
The central bank's forecast also influences long-term interest rates, which are determined by financial markets, analysts said, noting that rates rose last week after the report was released. The yield on the benchmark 10-year Treasury note, which influences mortgage rates, rose to 4.43 percent yesterday from 4.35 percent Monday. Rates rose in part because bond traders and investors calculate that stronger growth means either that inflation will rise or that the Fed will raise short-term rates more aggressively than otherwise to keep it under control.
A Fed spokeswoman declined to comment on the criticism.
In particular, critics questioned the forecast by most members of the central bank's top policymaking group, the Federal Open Market Committee, that the economy will grow between 4.5 percent and 4.75 percent this year, on an inflation-adjusted basis.
That would require "a virtual explosion in growth" in the second half of the year, because the economy expanded much more slowly than that in the first six months, said Mickey D. Levy, chief economist at Bank of America Corp., echoing other analysts.
The economy grew at a 3.9 percent annual rate in the first quarter of the year, the Commerce Department has said. The department will report the second quarter's growth on Friday, but most private analysts put it somewhere below 4 percent. Several economists estimated that the economy would have to grow at a more than a 5 percent annual rate for the rest of the year to hit the Fed's forecast -- at a time when interest rates are rising, the effects of the last federal tax cut are fading, the stock market is sagging and consumer spending has been flagging.