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Guest Post: Fed's Economic Projections - Myth Vs. Reality (Jun 2013)
Submitted by Lance Roberts of Street Talk Advisors,
Each quarter the Fed releases their assessment of the economy and their forward looking projections for three years into the future. (See Fed Projections Myth Vs. Reality for the March analysis)
While Bernanke puts on a great "dog and pony" show for the media – there are only two primary issues with which the financial markets are most concerned. The first issue is the Fed's commitment to continue the current liquidity programs into the future. Secondly, is the continuation of artificially suppressing interest rates by keeping the overnight lending rate, the Fed Funds Rate, near zero. In the latest FOMC meeting both of these goals were met:
"To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
While that sounds great on the surface this has hardly been the case historically.
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Mortgage rates have also risen which puts pressure on refinancing and purchases of homes particularly with the substantial price increases as of late. It is important to remember that people buy "payments" and not houses. With the bulk of the housing market currently driven by speculative demand, primarily from private equity and hedge funds, the rapid rise in prices is outpacing rental rates which historically has not ended well.
In regards to the continuation of ultra-accommodative interest rate policies the FOMC stated:
"To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored"
As I wrote recently in "The Fed Has Already Imposed a 'Cyprus Tax' On U.S. Savers" the impact of the Fed's zero interest rate policy is not achieving the Fed's two stated goals of full employment and price stability.
"The problem is that the actions of by the Fed are having the opposite of the intended effect. If you refer back to the chart above you will see that economic growth, savings, and incomes have all declined as the Fed has continually driven rates lower. Lower interest rates have not the boon of economic prosperity as advertised. What history does show is that higher levels of personal savings are necessary to support productive investment which leads to economic growth rates."
While the unemployment "rate" is declining, it is a very poor measure from which to benchmark the health of the economy. The drop in unemployment is primarily due to temporary hires, labor hoarding and falling labor participation rates. As shown below – real full-time employment as a percentage of the working population shows that employment has only marginally increased since the financial crisis. The drop in jobless claims does not necessarily represent an increasing employment picture but rather labor hoarding by companies after deep levels of employment reductions over the past 4 years.
The FOMC lives in a fantasy world. The economy is not improving materially and deflationary pressures are rising as the bulk of the globe is in recession or worse. The problem is that the current proposed policy is an exercise in wishful thinking. While the Fed blamed fiscal policy out of Washington; the reality is that monetary policy does not work in reducing real unemployment. However, what monetary policy does do is promote asset bubbles that are dangerous; particularly when they are concentrated in riskiest of assets from stocks to junk bonds.
However, if you want to see the efficiency of the Federal Reserve in action it is important to view their own forecasts for accuracy. I have been tracking the Fed's forecasts for you so that you can see the changes as they occur for GDP, Employment and Inflation.
Economy
When it comes to the economy the Fed has consistently overstated economic strength. Take a look at the chart and table. In January of 2011 the Fed was predicting GDP growth for 2012 at 3.95%. Actual real GDP (inflation adjusted) was 2.2% or a negative 44% difference. The estimate at that time for 2013 was almost 4% versus current estimates of 2.3% currently.
We have been stating repeatedly over the last 2 years that we are in for a low growth economy due to the debt deleveraging, deficits and continued fiscal and monetary policies that are retardants for economic prosperity. The simple fact is that when an economy requires more than $5 of debt to provide $1 of economic growth - the engine of prosperity is broken.
As of the latest Fed meeting the forecast for 2013 and 2014 economic growth has been revised down to 2.9% and 3.05% respectively as the realization of a slow-growth economy is recognized. However, the current annualized trend of GDP suggests growth rates in the next two years are likely to be lower that that.
With 48 months of economic expansion behind us this current expansion is longer than the historical average. Economic data continues to show increasing signs of weakness and the global economy is a drag on domestic exports. With higher taxes, government spending cuts and the debt ceiling debate looming the fiscal drag on the economy could be larger than expected.
What is very important is the long run outlook of 2.5% economic growth. That rate of growth is not strong enough to achieve the "escape velocity" required to substantially improve the level of incomes and employment that were enjoyed in previous decades.
Unemployment
The Fed's new goal of targeting a specific unemployment level to monetary policy could potentially put the Fed into a box. Currently, the Fed sees 2014 unemployment falling to 6.55% and ultimately returning to a 5.5% "full employment" rate in the long run. The issue with this "full employment" prediction really becomes what the definition of reality is.
Today, average Americans have begun to question the credibility of the BLS employment reports. Even Congress has made an inquiry into the data collection and analysis methods used to determine employment reports. Since the end of the last recession employment has improved modestly. However, that improvement, as shown in full-time employment to population ratio chart above, has primarily due to increases in temporary and lower wage paying positions. More importantly, where the Fed is concerned, the drop in the unemployment rate has been due to a shrinkage of the labor pool rather than an increase in employment.
The problem that the Fed will eventually face, with respect to their monetary policy decisions, is that effectively the economy could be running at "full rates" of employment but with a very large pool of individuals excluded from the labor force. Of course, this also explains that continued rise in the number of individuals claiming disability and participating in the nutritional assistance programs. While the Fed could very well achieve its goal of fostering a "full employment" rate of 6.5% - it certainly does not mean that 93.5% of working age Americans will be gainfully employed. It could well just be a victory in name only.
Inflation
When it comes to inflation, and the Fed's outlook, the debate comes down to what type of inflation you are actually talking about. The table and chart below show the actual versus projected levels of inflation.
The Fed significantly underestimated official rates of inflation in 2011. However, in 2012 their projections and reality became much more aligned. Unfortunately, in 2013 the deviation between expectations and reality has once again surfaced as deflationary pressures have risen and current inflation, as well as forecasts, have dropped markedly. The Fed's greatest economic fear is deflation and the current drop in annual rates of inflation will keep pressure on the Fed to continue to accommodative policy active for longer than most expect.
However, for the average American the inflation story is entirely different. Reported inflation has little meaning to the consumer as the real cost of living has risen sharply in recent years. Whether it has been the cost of health insurance, school tuition, food, gas or energy - these everyday costs have continued to rise substantially faster than their incomes. This is why personal savings rates continue to fall, and consumer credit has risen, as incomes remain stagnant or weaken. It is the rising "cost of living" that is weighing on the American psyche and ultimately on economic growth.
The Diminishing Effects Of QE
With the Fed committed to continuing its Large Scale Asset Purchase program (Quantitative Easing or Q.E.), and deploying specific performance targets, the question of effectiveness looms large. Bernanke has been quite vocal in his testimonies over the last year that monetary stimulus is not a panacea. In his most recently statement he specifically stated that "fiscal policy is restraining economic growth."
With the Fed now fully engaged, and few if any policy tools left, the economic effectiveness of continued artificial stimulation is clearly waning. Lower mortgages rates, interest rates and excess liquidity served well in priming the pumps of the real estate and financial markets when valuations were extremely depressed. However, four years later, stock valuations are no longer low, earnings are no longer depressed and the majority of real estate related activity has likely been completed. More importantly, the recent surge in leverage and asset prices smacks of an asset bubble in the making.
The reality is that Fed may have finally found the limits of their effectiveness as earnings growth slows, economic data weakens and real unemployment remains high.
Reminiscent of the choices of Goldilocks - it is likely the Fed's estimates for economic growth in 2013 are too hot, employment is too cold and inflation estimates may be just about right. The real unspoken concern should be the continued threat of deflation and the next recession.
One thing is for certain; the Fed faces an uphill battle from here.
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Economic projections are always a myth. Economic forecasts are no better at predicting the future of GDP than random. This is best explained in The Signal and The Noise by Nate Silver
http://dareconomics.wordpress.com/2013/06/20/around-the-globe-06-20-2013...
THe market today: Sell motherfuckers, sell. The last one out the door is a dead one.
The fed tires a bit more each day.
Kick those fuckan tires Uncle Shalom!
It's clear from that idiotic Q&A session yesterday that Bernanke has no fucking clue what he is doing.
"One thing is for certain; the Fed faces an uphill battle from here."
Just in time for Ben to head for the hills.
This is what I said yesterday, QE having diminishing returns as economy gets worse and value of paper assets deteriorates, requiring more QE to keep 'em inflated. It's happening to everything Fed buys, treasuries, MBS, foreign bonds, you name it.
Getting harder to keep these bubbles inflated as economy tanks, and it'll tank big time next year when Ocare comes online. Maybe why Bernanke is heading for the door.
tapering is not happening or the entire world will be a smoking hole in the ground. QE will be expanded you can count on that. http://tinyurl.com/mem7o7x
the markets are addicted to QE, the withdrawal process will be long and painful.
QE is the equilvalent of sythetic profits being injected into the economy.
We do not have profit growth significant enough to grow employment, let alone replace QE.
The US economy will be right-sized shortly.
What "withdrawal process" is that? I don't see anything happening like that.
Oh, the promises....yes indeed, the promises.
What the hell is happening with the Norwegian kronor, its down 4% against the dollar!!
>> its down 4% against the dollar!!
Be thankful it's not gold.
Or silver
HOW MUCH MONEY DID THE FED LOSE TODAY????????????
Or asked differently -- how much money did the future U.S. taxpayer lose today? Because last time I checked, the banks make their own money but lose yours.
I'd say they broke even on their naked short vix / short gold but taking a beat down on their SPY and long bond positions.
Waiting to see if SPY can close below 160.. then this whole 3 rd camel hump might just be a break out FAIL
Please explain, with the power to print money from nothing, can one loose money?
when you print enough
a few pallets of cash
are bound to fall off the truck somewhere..
thus you have lost " money "
the waterfall sell-off of those precious commodities shows that we are close to the big implosion and QEs are less and less effective in delaying the collapse of the pyramid.
So sell gold and silver and go long dogs and ponies?
Or . . . it means the dollar is up a ton.
BernanQE relativity theory...and the rest of the world is DOWN a ton. We are now exporting massive inflation and the Brazilian mobs are still massive. When food and energy costs skyrocket the 95% of the world's population will not be happy. The Pacific and Atlantic are very large moats to cross.
USD 81.91 +0.60
That's a ton?
When Ben steps up to the mike today or tomorrow to explain what he said yesterday was misunderstood, we're going to see the pm's go into a rocket launch mode.
If Ben needs any help writing his telemprompter...include the word "template" in his lecture.
who knew, lowering interest rates in a credit based economy was actually DEFLATIONARY!!
I wish Ben would send me my $3,000,000 stimulus so I can live in FOMC fantasy world too.
I promise I'll spend some of it and tip at 20%, Mr. Chairman.
Trickle down! C'mon Doctor QE!
Honestly, I think given how political this has become and Ben wanting to at least have attempted to curb QE before leaving, is doing this and will start to taper as early as next month...$5B less per month through end of the year and if things suck, he will retire, hand it to Yellen who as a dove will jack it back up to $100B/mo.
Perhaps, as long as they have enough Mom and Pop investor money off the craps table to ramp it up again.
Where's Bubbles Bernanke when we need him? Who does he think he is, letting us down like this! Of all the NERVE!
Why, if he lets up with the money printing, we might actually have to WORK for a living! We might have to actually PRODUCE something! We might have to do R&D! We might have to become more PRODUCTIVE or something!
Doesn't he know we have a RIGHT to free money? Doesn't have know it's our ENTITLEMENT? Doesn't he know we can't SURVIVE without endless free money?
Did Bubbles fall asleep in his helicopter or something? How DARE he! He should be ASHAMED of himself! Ugh!
New lows: Dow support is at 14,500, down 325, just 2.2% more, but hard to imagine a black Friday bottom. My screens suggest serious knife-catching Monday, down 3 % more. This will be one long weekend at Bernanchios.
Spurs
Heat
The only projection that counts tonite.
Maybe we have reached the tipping point and the Great depression can start in Ernest. A replay of the 30's.
Sorry, but I will RESIST living in a world which accepts "moderate inflation"...why should there be ANY inflation???
Great article. Re: personal inflation, there should be a measure of inflation rate vs. disposable income...if I have $200 of disposable income in January on $50K yr or $30K takehome or $2500/mo...then that means I am spending $2300/mo. 6% annual inflation on things that I buy with that $2300 is $138, meaning I now have $62 for things like movies, restaurants etc....1 or 2 years of this with no wage growth and the economy grinds to a complete halt.
Yes, no kidding the Fed is in a tough spot, but if you keep telling the lie long enough, it becomes the truth. Keep selling it, and people will eventually buy it. Often times, the truth just gets in the way. If the government is paying people to be unemployed, are they really unemployed? If debt is being bought, regardless of buyer, is it still the seller's debt? Growth is measured incrementally, relative to the recent past, growth is still growth. Clearly it's a game of nutshell, but sleight of hand works because it confuses.
As I see it, the Fed is buying stocks indirectly. The money they give to the banks and lenders is not being lent out, but for book balancing and reinvested in the market for profit. The asset bubble that's been created is an enticement for the profiteering companies, (Dow and S&P), to do what the lenders aren't. Invest in themselves directly to expand for growth and more profit.
At this point, the Fed will likely double down on money priming, as the supposed new chairwoman is Krugman in a dress. Hey, when you're already $18 Trillion in debt, what's another 5 or 6T? Meritocratic egalitarianism for the masses is coming. If you're special, you'll be special, otherwise you're not. Washington is all about it, just coming at it from opposite ends. The debt may not really mean anything. Economic implosion isn't the worst thing that could happen. There's a reason the U.S. spends trillions of dollars on it's military. They can always load up the gunships, tanks, and aerial support to do whatever needs to be done in almost any situation. Go where the money is, I'm buying what the Fed is buying.
The beautiful thing about the Bernank's forecast is that it will be as wrong as rain. The "taper" if it happens at all will last maybe one month before the Fed announces a new, increased bond buying program.
Funny how in all the minutia of the bullshit housing number today, the jobless claims were up 18,000, waaay worse than expected.
Yeah, fuckwads, the economy is getting better, except there are no jobs unless you are a connected gov't piece of shit. If not, then you're just shit out of luck except for the occasional burger flipping job that might be available at your local burger stand.
Bring on the printing and the gold price ramp or just bring on the fucking civil war where we get a chance to take out as many bankers as is humanly possible.
BTW - fuck you NSA
Umm ... as I wrote a few days ago, the Fed is unmoved by the real economy. Its first objective is monetizing government deficits, which are currently shrinking. Hence the taper talk.
The Fed has also belatedly realized the huge bubbles in commodities, stocks, and real estates it has (re)blown. Realizing it now is better than realizing it later.
The bond market reaction is a puzzle. QE doesn't raise bond prices. It lowers them, because the Fed is a price-insensitive buyer, while the sellers are price-sensitive. The more they sell, the lower the prices go. (The anticipation of QE does raise bond prices, as bond traders front-run.) Once we see real risk-off underway, and we're only just seeing the beginning, bond prices will rebound, sharply.
We could see the ten-year at 1.5% in six months; by the next recession, it could be as low as 1%. The 30-year will be back below 3%.
The wild card is ZIRP, not QE. When will ZIRP end? Very unlikely to end before 2015/H2, at the soonest. Is that what the bond market has in mind? Because it is ZIRP, not QE, that is holding up bond prices. In any case, the bond market seems far ahead of itself.
There's also a lot of confusion out there about the difference between ZIRP and QE. But the QE-risk asset relationship does again show how much this is a function of flow, not stock. It's all about stoking financial markets, not the real economy. If the new M1 were circulating, we'd see a "stock" effect from a larger monetary base. But that is so small as to be undetectable. It's all flowing within the "canyons of Wall Street," as David "Stock"man put it.
(Sorry for the pun.)