Federal Reserve chairman Ben Bernanke gave testimony today on the future of the Fed’s easing program. “The current pace of purchases could be maintained for longer,” Bernanke warned. He cautioned that inflation might remain “too low,” the outlook for employment might decline or “financial conditions — which have tightened recently — were judged to be insufficiently accommodative to allow us to attain our mandated objectives,” Bernanke told the House Financial Services Committee.
Markets rose after his testimony, with the Dow up a modest 0.13 points. The ho-hum reaction would seem to indicate investors are aware of his backtracking in order to save face after markets reacted to his last “tapering” announcement last month with a stock dump.
Bernanke didn’t say anything surprising today. He rarely does. His job is to babysit fussy investors and deflect inquiries from his incompetent congressional overseers, being as obtuse as possible over the details. You may want to keep in mind, however, that this particular central bank has been wrong about its GDP forecasts for much of the last decade. “The Fed is wrong all the time,” noted The Washington Post last month, citing extraordinarily optimistic Fed forecasts from 2009-2012 that never came to pass. Says the Post:
“In 2009, the Fed was predicting 4.2% growth in 2011. Awesome! But then in 2010, it revised that down to 3.85% growth. And in 2011, they revised it further to 2.8% growth. And when all was said and done, the economy only grew about 2.4% that year. The Fed projected growth almost twice as fast as what actually happened.“Same deal for 2012. The Fed’s first forecast, in 2010, projected 4% growth. 2011′s projections reduced that to 3.5% growth. 2012 knocked it down to 2.15% growth. And the final number was about 2%.”
“In 2009, the Fed was predicting 4.2% growth in 2011. Awesome! But then in 2010, it revised that down to 3.85% growth. And in 2011, they revised it further to 2.8% growth. And when all was said and done, the economy only grew about 2.4% that year. The Fed projected growth almost twice as fast as what actually happened.
“Same deal for 2012. The Fed’s first forecast, in 2010, projected 4% growth. 2011′s projections reduced that to 3.5% growth. 2012 knocked it down to 2.15% growth. And the final number was about 2%.”
Fed officials estimate the 6.5% unemployment threshold could be reached by the end of next year. That outlook is based on estimated growth of 3-3.5% for the economy in 2014, according to the committee’s June central tendency estimates.
The Fed’s forecasts for this year don’t really jibe with other estimates. The IMF estimated U.S. GDP growth would be about 1.7% this year and 2.7% next year. The World Bank cut its forecasts to 2.2% for this year. Several major banks, including Bank of America and Goldman Sachs, also reduced their Q2 forecasts as June data came in by as much as 1%, according to fabiusmaximus.com. A Bloomberg estimate of private GDP forecasters was also lower, at 2.9%
Shrinking forecasts aren’t the only problem. The reality of GDP growth with respect to forecasts has not been encouraging. In Q1 2013, growth missed its projection of 3.0% by 0.5%, according to a report by Bloomberg last April.
If you are pricing in the end of QE, you may want to heed the chairman’s warning this time… easing may continue for quite a while.
For The Daily Reckoning
P.S. “This systematic dismantling of the momentum names tells me traders are getting nervous,” Greg Guenthner noted in this morning’s Rude Awakening. High-growth stocks may be in trouble. You can get his regular updates by subscribing for free to The Daily Reckoning. Click here.
Modern Keynesians like Paul Krugman pooh-pooh the notion of balanced budgets and fiscal restraint. Where could he get such a notion?
Jason M. Farrell is a writer based in Washington D.C. and Baltimore, MD. Before joining Agora Financial in 2012 he was a research fellow at the Center for Competitive Politics, where his work was cited by the New York Post, Albany Times Union and the New York State Senate. He has been published at United Liberty, The Federalist, The Daily Caller and LewRockwell.com among many other blogs and news sites.
Thanks to the tireless efforts of the Federal Reserve, currency in circulation is up $72.5 billion in the last year - which equates to $234 for every man, woman and child in America. And after rifling through his wife's purse yielded fruitless results, The Mogambo Guru has launched an all-out investigation to find his share. Read on...
With so much turmoil and political strife throughout the world, it can be difficult to realize how bright the future of technology is. Luckily, Stephen Petranek hasn't lost sight of that. Today, he describes seven important stories that will shape the future... and how a few savvy investors can make a killing in the process. Read on...
The Affordable Care Act creates a new health insurance marketplace (the exchange). But because of the great uncertainty about what buyers will enter the market and who will buy what product, the law creates three vehicles to reduce insurance company risk. John Goodman explains why this is such a dangerous proposition...
The biotech industry has dominated the market so far this year; and early investors in this sector have practically won the lottery. But with such an incredible run up, could this bull market be nearing exhaustion? Greg Guenthner investigates, and offers some sage advice for investors willing to take a chance. Read on...
Generally speaking, gold miners are bad businesses. They bury perfectly good cash in the ground and tend to issue lots of shares just to stay afloat. So when one comes along that actually turns out to be a good business, it's important to take note. Chris Mayer has found just such a company. Read on...