Recently, Politico reported that former Treasury undersecretary Randy Quarles will likely be nominated as the Federal Reserve’s top bank regulator. Since a potential Quarles appointment is viewed by some as a continuation of “business as usual” at the Fed, it’s prudent to revisit the Fed’s recent ineptitude that has shrunk its credibility.
This Friday, the Bureau of Economic Analysis will release its early estimate of how the U.S. economy performed in the first quarter of 2017. Adding greater intrigue, the Federal Reserve’s economic forecasts are all over the place.
The Fed’s confusion over the health of the economy is made public by contradicting models from two of its regional banks: New York and Atlanta. While the New York Fed predicts our economy expanded at a lukewarm 2.7 percent in the first quarter (just shy of our roughly 3 percent post-WWII average), the Atlanta Fed believes our economy expanded by only 0.5 percent, which would represent an economy teetering on recession.
While the Atlanta Fed and New York Fed models have varying inputs (and Fed officials look at numerous indicators before making policy adjustments), it’s still startling to see the enormous gap in conclusions one would draw based on these differing models.
The Fed’s apparent cognitive dissonance is even more worrying considering the power this bank holds over the economy. The Atlanta Fed’s and New York Fed’s respective models are roughly $350 billion apart — and that’s just for 3 months’ worth of economic activity.
The opposing models provide evidence that the Fed is not the all-knowing economic juggernaut it positions itself to be. The Fed’s inability to gauge the health of the economy was also on display last year, when the Fed was forced to scale back its anticipated four interest rate hikes to one due to slower economic growth than anticipated.
Often, the Fed’s prognostications appear to be little more than economic cheerleading. As Business Insider stated, “The Federal Reserve has been infamously overoptimistic about the US economy in recent years, prompting them to frequently revise down their forecasts for economic growth as the year progresses.”
Additionally, Reuters noted:
Actual GDP growth in both 2011 and 2012 was lower than the most pessimistic forecast among Fed policymakers’ full range of predictions. Since 2010, the midpoint of the central tendency has been on average 0.8 percentage points too high.
In 2010 the midpoint of policymakers’ predictions was 3.3 percent for 2011. Actual GDP growth was 1.7 percent. In 2011 the midpoint of forecasts was 2.7 percent for 2012 and the outcome was 1.3 percent.
The Fed’s long history of faulty predictions led Ralph Benko at Forbes.com to remind us:
If NASA suffered from comparable inaccuracy the manned spaceflight program would have been shut down by an endless series of Challenger-type catastrophes many years ago. With forecasts this bad is it any wonder the American economy continually crashes and burns?
Hopefully President Trump will take a bold approach to transforming a central bank whose business-as-usual performance is marred by internal confusion and failed analysis. It’s time to bring fundamental change to the gang that can’t shoot straight.
Photo credit: Justin Ladia via Flickr, CC BY 2.0