Federal Reserve lied about actual growth of US economy

Federal Reserve officials, who have persistently overestimated the strength of the economic recovery, predicted last June that the economy in 2014 would finally grow more than 3 percent for the first time since the recession.
The updated forecasts the Fed will publish on Wednesday are likely to reflect more modest expectations.  http://www.nytimes.com/2014/06/18/upshot/federal-reserve-expected-to-reduce-growth-forecast-but-keep-cutting-stimulus.html?ref=us&_r=0The economy, after all, actually shrank during a wintry first quarter. High hopes are being replaced once again by disappointing  data. The Fed’s policy-making committee is still expected to announce another
$10 billion cut in its monthly bond purchases, to $35 billion a month, in keeping with its plan to end the purchases this fall. Fed officials regard the first quarter as an aberration, and they say that this time, the economic expansion really is gaining strength.
But the continuing wait for faster growth has reinforced the concern of some critics that the Fed is retreating too quickly from its stimulus campaign. Some see evidence the Fed is undermining its own forecasts by providing less support to the economy.
And it has even led some Fed officials to suggest that the central bank should discount its own predictions in deciding how quickly to scale back its own efforts to encourage growth.
“Given the persistent overoptimism about the growth outlook by Federal Reserve officials and others in recent years, we shouldn’t count our chickens before they hatch,” William C. Dudley, president of the Federal Reserve Bank of New York and vice chairman of the Fed’s policy-making committee, said last month in New York.
The pattern is striking. In every year since 2008, Fed officials have steadily reduced their initial expectations for economic growth. In each year except 2012, they had still overestimated the strength of the economy in June of the forecast year.
The consequences at times have been painful. Fed officials have said they did not act more strongly to stimulate the economy in the immediate aftermath of the recession because they expected the economy to rebound more quickly.
Fed officials argue that unanticipated economic setbacks have contributed to their failures of foresight, including spending cuts by federal, state and local governments, the European economic crisis and, most recently, an unusually cold winter.
But officials have also acknowledged that the impact of those setbacks appears to reflect an underlying weakness in the economy that they did not anticipate.
Josh Bivens, director of research and policy at the left-leaning Economic Policy Institute, said economic conditions in recent years had few precedents, making it hard to predict the pace of the recovery. Traditional models assume the Fed can restore growth by cutting interest rates, but the Fed has held interest rates near zero since late 2008, and that has proved insufficient. That has left forecasters guessing, he said.
“You can definitely be sympathetic with them,” he said. “We’re just in uncharted territory.”
Fed officials have adjusted by gradually backing away from their assumption that the economy will rebound strongly. Officials make an initial forecast two years before the beginning of a given year. Those long-range forecasts reflect their views of the economy’s potential more than the conditions that are likely to prevail at that time. And for the last five years, Fed officials have steadily reduced their expectations. In 2009, they estimated that growth in 2012 would run as high as 4.8 percent. Last year, they estimated that growth in 2016 would run no higher than 3.3 percent.
Such slow adjustments are typical, researchers have found. William D. Nordhaus, a professor of economics at Yale, found in a benchmark 1985 paper that forecasters are anchored to their opinions. “We break the good or bad news to ourselves slowly, taking too long to allow surprises to be incorporated into our forecasts,” Mr. Nordhaus wrote.
Tim Duy, a professor of economics at the University of Oregon and a prominent commentator on the central bank, said Fed officials had undermined their own forecasts by reducing support for the economy.
“At times they’ve been their own worst enemy,” he said. “Their discomfort with the general policy stance has left them looking for a way out, and the way out is to forecast stronger growth and to say, ‘Once we see that rebound, we’re going to reverse.’ ” As a result, he said, “they end up fighting their own forecast.”
Mr. Duy said that last year was a particularly striking example of the Fed’s tendency. Officials predicted strong growth and began to talk about the need to taper the Fed’s bond purchases. Interest rates rose, the housing market hiccupped, and growth once again ended up falling short of Fed officials’ expectations. “The desire to get out is clouding their judgment with regard to the forecast,” he said.
While the unemployment rate has fallen faster than Fed officials expected, the pattern regarding the economy’s overall output appears to be repeating itself this year. Fed officials projected in January 2012 that growth this year could reach 4 percent. Even at the beginning of this year, many expected that growth would finally top 3 percent.
By March, Janet L. Yellen, the Fed’s chairwoman, was already acknowledging that the Fed had been a little irrationally exuberant.
“Incoming data since January, when our statement sounded quite an optimistic tone, were partly down due to weather and partly down because we probably overdid the optimism in January,” Ms. Yellen said at a news conference.
She will answer questions again on Wednesday.

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