Economic Week in Review: The Fed details its slow-growth projections January 27, 2012
Amid some encouraging signs that the economy continues to grow modestly, Federal Reserve officials gave an unprecedented look at the details of their economic expectations. In a report issued Wednesday, the Fed signaled that it expects growth to remain modest enough to allow short-term interest rates to remain near rock bottom for even longer than it had projected in recent months. For the week ended January 27, the S&P 500 Index rose 0.1% to 1,316 (for a year-to-date total return-including price change plus dividends-of about +4.8%). The yield on the 10-year U.S. Treasury note fell 12 basis points to 1.93% (for a year-to-date increase of 4 basis points).
Fed extends its ultra-low rate pledge
The Federal Reserve's policymaking committee announced that it now expects to keep its key short-term interest rate near zero until late 2014, an extension of its earlier projection. Last year, it said it intended to keep the federal funds target rate between 0% and 0.25% until at least mid-2013.
In its first meeting since announcing it would issue more detailed explanations of its projections, the committee and Federal Reserve Bank presidents also disclosed their individual expectations for the rate down the road. The officials' projections were evenly spread among those who think the rate might have to be increased sooner, those who expect the rate to be raised by late 2014, and those who expect the rate to stay at its current level even longer than 2014.
The committee also said it expects the unemployment rate to fall to between 8.2% and 8.5% this year, a slight improvement over its prediction in November. But the Fed also predicted the economy will grow between 2.2% and 2.7% this year, slightly slower than it had previously thought. The committee also projected inflation would remain below its now-official long-term target of 2%, hovering between 1.5% and 1.8% this year.
Leading indicators tick upward
The Conference Board's measure of potential future economic activity rose 0.4% in December, a bit lower than expected but higher than November's 0.2% increase. Eight of the gauge's ten components were positive, with the strongest readings coming from a rising spread in interest rates and improving jobless claims.
The indicators "provide some reason for cautious optimism in the first half of 2012," said Ken Goldstein, economist at The Conference Board. "This somewhat positive outlook for a strengthening domestic economy would seem to be at odds with a global economy that is losing some steam. Looking ahead, the big question remains whether cooling conditions elsewhere will limit domestic growth or, conversely, growth in the U.S. will lend some economic support to the rest of the globe."
GDP turns upward in 4th quarter
The first estimate of the nation's gross domestic product (GDP) for the fourth quarter showed the U.S. economy grew at an annualized rate of 2.8%, which was a bit lower than expected but the strongest showing since the second quarter of 2010. The improvement in the most recent quarter came almost entirely from increased inventory investment, which is unlikely to be sustainable in the early part of 2012. Consumer spending improved slightly, fixed investment slowed considerably, international trade went from a net positive to a slight drag, and government spending became a bigger brake on growth.
For the year, the U.S. economy grew 1.7%, down from a 3% rise in 2010. A spike in commodity prices during the first part of 2011, the earthquake disaster in Japan, sovereign debt worries in the Eurozone, and political bickering in Washington, D.C., combined to slow the U.S. economy.
Investment and exports were the strong points in the data for the year.
"This latest GDP report reflects what we expect for 2012: government spending becoming more of a drag as fiscal consolidation kicks in, consumer spending contributing less than its normal two-thirds share of the economy as households continue to work down their debt loads, and businesses holding back on spending plans until the future looks more certain," said Roger Aliaga-Díaz, senior economist at Vanguard. "As a result, we're expecting a sustained period of positive but below-average growth."
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Steven C. Deller
Professor and Community Development Economist
Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension
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608-263-6251
"I started out with nothing and I still have most of it left."
Seasick Steve
