The Fed Surrenders
The central bank underscores the slow-growth reality.
So much for that June interest-rate increase, and maybe for July and the rest of 2016 too. The Federal Open Market Committee, which had been insisting for months that the economy is healthy enough to take rising rates, capitulated on Wednesday and signaled slow economic growth as far as their eyes can see.
As recently as December, the FOMC members had a median growth estimate for 2016 of 2.4%.
By March it had fallen to 2.2%, and on Wednesday it was down to 2%. This follows the Federal Reserve’s consistent record of forecasting error during this expansion in which it has begun every year predicting stronger growth than has always occurred.
Economic forecasting isn’t easy, but you could flip a coin and get it right more often than the Fed has since the recession ended seven long years ago this month. The indisputable fact is that the central bank has consistently overestimated the stimulative effect of its monetary exertions.
The Fed keeps saying its policies are “accommodative,” and while they have contributed to higher prices in stocks, real estate and other assets, they aren’t accommodating faster growth or broader prosperity.
This time the FOMC vote holding the target fed funds rate steady at 0.25%-0.5% was unanimous, which reflects the genuine risks to growth. Esther George, the Kansas City Fed president who had dissented the last two meetings, joined the new caution amid signs of a slowing job market, lousy business investment, and the risk of market turmoil if Britain votes to leave the European Union next week.
More distressing, the Fed now predicts growth won’t improve even in 2017-2018. In previous years the FOMC median forecast typically predicted that growth would accelerate in the future to a more normal rate above 3%. But now even the Fed has accepted the new abnormal of 2% being the best we will do. This may be more realistic than its previous optimism, but it also underscores America’s depressing slow-growth reality.
First they said $800 billion in fiscal stimulus would stir a return to prosperity, then they said that monetary stimulus would do the trick. Now they blame their failure on “secular stagnation” and Republicans in Congress whose pro-growth proposals have been blocked at every turn by Senate Democrats and President Obama.
Poor Paul Krugman has to resort to requoting the same snippet of our editorial from 2009 to suggest we were wrong to oppose policies that haven’t worked and about an inflation surge we didn’t predict.
We can understand why he wants to change the subject because the reality is that this is the Krugman-Obama economy. The White House and Fed have spent eight years pursuing the City University economist’s agenda of raising taxes, increasing regulation in every possible section of the private economy, and trying any new monetary experiment.
Seven years after the recession ended, we know the score: The slowest expansion in decades, falling labor participation rates last seen in the 1970s, mediocre business investment, a declining pace of business start-ups, disappointing wage growth, rising inequality, and an outbreak of angry populism on the left and right. If we were responsible for that result, we’d try to deny paternity too.