Coverage: Fed is predicting steady economic growth

The Federal Reserve Board’s view of the American economy, which it updated Friday in a semiannual report to Congress, predicts steady growth still impeded by a range of problems, according to various business media outlets.

Binyamin Appelbaum of the New York Times had the news:

The report gives the reasons for confidence, describing the steady growth of consumer spending on the foundation of a solid economic expansion. However, it also highlighted a number of reasons that growth has remained relatively slow by historical standards.

The Fed raised its benchmark interest rate in June for the third consecutive quarter, a sign of confidence in the strength of the economy. It also announced that it planned to start reducing its securities holdings by the end of the year.

The Fed pointed to evidence that lenders are seeking opportunities to take larger risks. It noted, for example, that companies with poor credit ratings are able to borrow at interest rates that are unusually close to the rates for companies with good credit ratings. The differences “now stand near the bottom of their historical ranges,” the Fed said.

Dan Kopf of Quartz noted that the Fed’s economic forecasts have been too optimistic during the past decade:

This isn’t just embarrassing for the Fed’s prognosticators: University of Berkeley economist Brad Delong thinks this overoptimism could be harming the economy. Delong, a former assistant secretary at the US Treasury, writes on his blog that Americans should be “gravely worried” that the Fed has been prematurely raising interest rates based on rosy projections. The country is losing needed monetary stimulus as a result.

So, how far off has the Fed been?

Quartz compiled the Fed’s projection made towards the beginning of each year since 2008, and compared that with what actually occurred. Each projection is an estimate for GDP growth in the forthcoming three years. (Technically, the estimate is the midpoint of the Fed’s central tendency for GDP growth.)

The chart below shows how far off the Fed was in each year. For example, at the beginning of 2008, the Fed projected 2008 GDP growth of 1.65%, but in actuality it was -2.8%, so we have them as off by +4.45 percentage points. On average, since 2008, the Fed overshoots annual GDP growth by 1.2 percentage points, with overoptimism the highest for projections farthest into the future.

Steve Goldstein of MarketWatch.com reported that the Fed is sticking to its belief that interest rates need to be raised:

The Fed on Friday said it expects a “gradual” increase in interest rates and for balance-sheet normalization to begin this year. That’s the same assessment the Federal Open Market Committee gave after its June meeting, and comes ahead of Federal Reserve Chairwoman Janet Yellen’s testimony on Capitol Hill next week. Yellen testifies before a House panel on Wednesday, and moves to the Senate on Thursday.

The Fed said the economy will continue to expand at a “moderate” pace, justifying further rate increases even after three quarter-point hikes since December. Job-market gains should support income and wealth, underpinning consumer spending as credit continues to thaw.

Business investment has also turned up, while corporate financing conditions remain accommodative, the Fed said in the report.

In a section on financial stability, the Fed again acknowledged that valuation pressures are on the rise, but seemed content as asset-market gains haven’t led to increased borrowing outside of the financial sector.