Federal Reserve: Increasingly Defensive and Admits Structural Issues
Posted by Larry Doyle on November 22, 2010 7:55 AM |
The Federal Reserve may be America’s greatest enigma.
The Fed would clearly much prefer to remain opaque in the midst of our current economic turmoil. However, even the ‘all powerful’ Fed is unable to withstand the pressure from those seeking answers and clarity while navigating our economic landscape.
I have often tried to highlight the Fed’s shortcomings and inconsistencies. From the Fed’s overly optimistic economic projections to its unwillingness to openly admit the ongoing structural issues and changes within our economy, I believe the Fed has been playing politics for far too long and well beyond its goals and mandates.
Those political games are now coming back to smack the Fed in the face. Secretary Geithner and others can whine and moan all they want about Fed critics maligning our central bank’s credibility. Geithner and others need to appreciate that they themselves have lost credibility as well. Why’s that?
When central bankers and public officials are not honest and straightforward with the American public, they put themselves in the position of feeling the public’s wrath. In response to that wrath, it is no surprise that those very same central bankers and officials may attempt to act in a somewhat more honest fashion. I believe this reality is simple human nature and I witnessed it overnight in reviewing a Financial Times commentary, Pessimistic Fed to Slash Growth Forecasts,
The US Federal Reserve will slash its growth forecasts and predict higher unemployment when it releases updated economic projections this week.
The Fed will release the latest forecasts made by members of its rate-setting open market committee on Tuesday, alongside the minutes of their November meeting, giving a complete picture of why they launched a new $600bn round of asset purchases.
The revised forecasts will show how the Fed became much more pessimistic over the summer and also highlight fears among a few members of the FOMC that some of today’s 9.6 per cent unemployment rate is structural and will take years to cure.
I believe this last statement is a crock. “Much more pessimistic over the summer?” Stop it. The Fed has known all along that our economy is going through significant structural changes and is drowning amidst waves of debt. I believe the Fed has tried to ‘talk’ the economy through our turmoils in the hope of maintaining consumer confidence. Now they are being called on the carpet for their policies and programs and finally held to account.
When the FOMC published its last forecasts in June most members thought that 2011 growth would be between 3.5 and 4.2 per cent, but many now think growth will be between 3 and 3.5 per cent, and some expect less than that. (LD’s highlight)
FOMC members have made particularly aggressive upward revisions to their unemployment forecasts, with a large number now predicting that it will still be 8 per cent or above at the end of 2012, compared to the 7.1 to 7.5 per cent that they forecast in June.
“Because I expect hiring to strengthen only gradually, the unemployment rate is likely to remain elevated for quite some time. In fact, I do not expect it to fall below 8 per cent before 2013,” Sandra Pianalto, president of the Cleveland Fed, said in a speech last week.
Some Fed officials have become concerned that workers have the wrong skills, or are trapped in the wrong places because they cannot sell their home, and will struggle to find jobs even once the economy fully recovers.
This final statement addresses the ‘structural’ changes and is a whiff of truth amidst so much political Fed-speak. This reality is not a new development but was present in 2007 when our economic downturn began.
What will the Fed’s quantitative easing program do to address these structural issues? Nothing. Let’s stop the nonsense!!
THE FED’S QUANTITATIVE EASING PROGRAM IS NOTHING MORE THAN AN ATTEMPT BY THE FED TO MONETIZE OUR NATION’S DEBT AND PUSH IT OFF TO FUTURE GENERATIONS. THAT POLICY HAS DONE NOTHING FOR THE JAPANESE ECONOMY AND IT WILL NOT WORK HERE EITHER. BUYING TIME DOES NOT SOLVE STRUCTURAL ISSUES.