Is There Confusion (or Worse) at the Fed?

By Steve McCann

The Federal Reserve is scheduled to release its updated economic projections this week. These projections, along with the minutes of the November meeting, will be released on Tuesday. This will ostensibly explain why the new round of quantitative easing amounting to a minimum of $600 billion.

The revised forecast will show the Fed became much pessimistic over the summer and highlight fears among the some members of the open market committee that the majority of today's 9.6% unemployment rate is structural and will take years to cure.

Last June when the Fed published their last forecast, they thought that 2011 GDP growth would be between 3.5% to 4.2%, but now they predict growth between 3 and 3.5%. However many economists in the private sector are more pessimistic, forecasting growth between 2.3 and 3.0%. In order to have any meaningful job creation that rate must be above 4.0%.

The FOMC members have also revised their unemployment forecasts, with a majority now predicting that will still be above 8 % or above at the end of 2012. (They projected a rate of 7.1 to 7.5% in June). Again, private economists are forecasting that the rate will not fall below 9.0% by 2012.

However, the most strange of all is the Fed's likely prediction that core inflation will stay below their 2% goal for the next three years. Charles Evans, Chicago Fed President, said in a recent speech:

It is not unreasonable to expect 1per cent inflation in 2012. Unless the actual conditions turn out to be very different from my forecast, inflation of less than 1.5% in 2013 is a strong possibility.

Throughout the globe, governments are now taking steps to fight inflation. China is experiencing an annualized inflation rate of 14% (food up over 20%). Overall commodity prices for staple food and energy items are up across the board by an average of 32% from a year ago. The manufacturers and processors will no longer be able to absorb these costs and American consumers are already experiencing higher prices at the fuel pump and grocery store.

Is the Fed still looking at the world through rose colored glasses? Are they making policy and risking further economic destabilization by not acknowledging reality? It would appear so. We will find out tomorrow.