The Fed's broken crystal ball
Thursday, July 15, 2010 at 08:28PM CNNMoney.com
How nervous should investors be about the Federal Reserve being more nervous?
The latest forecasts from the Fed released Wednesday cut estimates for economic growth, predicted that high unemployment will be more persistent than previously thought and raised the risk of a fall in prices, or deflation, which in itself can cause businesses to cut output and staffing.
Still, investors seemed to shrug off the outlook. Stocks drifted lower immediately after the Fed forecasts were released at 2 p.m. Wednesday, then rallied in the last 90 minutes of trading to end little changed from the previous session.
That may be because growing concerns about U.S. economic recovery possibly stalling out were already priced into the market. But it could be partly because the Fed hasn't had the best track record at predicting these numbers.
In its forecasts of June 2008, seven months after the recession is now known to have begun, the Fed's forecast still projected the economy would avoid a recession, and that the annual unemployment rate would show little change, remaining in the 5% range over the following three years. Instead, it shot up like a rocket, topping out at 10.1% in late 2009 and averaging 9.7% so far this year.
And the Fed hasn't always been so sunny. It has also been too pessimistic at times, which has also drawn criticism.
Reader Comments