Fed Dials-Down Its 2014 Economic Forecast

The Fed Open Market Committee (FOMC) concluded its latest two-day policy meeting yesterday with no big surprises in its formal policy statement. Yet the Fed significantly reduced its forecast for economic growth this year, as I will discuss below.

In yesterday’s policy statement, the Fed stated that it would reduce its monthly QE purchases by another $10 billion, as was widely-expected. Going forward, the Fed will be purchasing $15 billion per month in mortgage-backed securities and $20 billion per month in long-dated Treasuries, for a total of $35 billion a month – down from $45 billion a month since the beginning of May.

The statement indicated that the Fed believes the economy has “rebounded in recent months,” and they expect the slow recovery will continue.

“The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually…”

The statement included the same language regarding how long it might keep the Fed Funds rate near zero “…for a considerable time after the asset purchase program [QE] ends…” The statement suggested once again that the Fed may keep the rate near zero for some time even after its employment and inflation targets are reached.

Ahead of the FOMC meeting, there was some anticipation that the Fed would announce plans to increase interest rates earlier than it has hinted in the recent past. However, there was no such language in the statement suggesting that the Fed was considering raising rates earlier than previous indications.

Earlier this year, Chair Janet Yellen had suggested that short-term rates would not likely begin to rise until at least six months after the QE program ends in October, which would mean sometime next spring. When asked about this in her press conference following the meeting yesterday, Chair Yellen said that the only reason the Fed would raise rates sooner would be if the economy strengthens significantly more than expected. And she added that if growth is slower than expected, short rates would remain near zero even longer.

The Fed did revise its Fed Funds rate targets ever so slightly yesterday. It now projects the Fed Funds rate will reach 1.2% by the end of 2015 and 2.5% by the end of 2016.

The Fed also released its latest forecasts for the economy, the unemployment rate, the inflation rate and the Fed Funds rate. In yesterday’s projections, the Fed downgraded its outlook for the economy (GDP) in 2014 significantly from 2.8-3.0% predicted in March to only 2.1-2.3% now. The Fed left unchanged its forecasts for GDP in 2015 and 2016 at 3.0-3.2% and 2.5-3.0%, respectively.

The Fed revised its forecast for the 2014 unemployment rate from 6.1-6.3% in March to 6.0-6.1% as of now. The Fed projects that the unemployment rate will fall to 5.4-5.7% in 2015 and 5.1-5.5% in 2016.  As for inflation, the Fed expects it to remain at or below 2.0% all the way through 2016.

Stocks and bonds rallied after the Fed statement was released and following Yellen’s press conference, with the Dow closing up almost 100 points on the day.

In other news, a new national poll from NBC/Wall Street Journal yesterday was loaded with bad news for President Obama. His job approval rating – at 41% – is as low as it has ever been. Four in ten Americans say the performance of his administration has gotten worse over the past year. Large majorities disapprove of how he is handling foreign policy, which has been front-and-center of late thanks to the eroding situation in Iraq and the Bowe Bergdahl prisoner swap.

And yet, all of those bad numbers pale in comparison to how people responded to this question:“Thinking about the rest of Barack Obama’s term as president, do you think he can lead the country and get the job done, or do you no longer feel that he is able to lead the country and get the job done?”

Fifty-four percent – let me repeat, 54%– said that Obama “cannot lead and get the job done,”while just 42% said he could do so.  Here’s the breakdown of responses on this one:  84% of Republicans said that Obama can’t lead or get the job done, as did 61% of Independents, while only 20% of Democrats agreed.

That is an absolutely remarkable vote of no-confidence in Obama’s ability to do the job he was elected to do. Yes, it’s true that Republicans are going to be against virtually everything Obama is for, but it is most interesting that over 60% of Independents now agree.

The rash of Obama scandals is now taking its toll. This is NOT good news for the Democrats come the mid-term elections in November. And they know it.

Posted 06-20-2014 2:52 PM by Gary D. Halbert
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