Sometimes it’s better to just leave things alone

Yeah, I believe this one!

And another one from Heather Long, who’s fast becoming one of my favorite economic reporters:

So, Dr Yellen says that the Fed doesn’t “see the economy as overheating now.” Yeah, I guess that’s right!

Fed leaves interest rates alone; dials down 2016 forecast

by Patrick Gillespie | @CNNMoney September 21, 2016: 2:49 PM ET

The Federal Reserve is still waiting for the right moment to raise interest rates.

Fed leaders decided not to increase the bank’s key interest rate on Wednesday at the conclusion of a two-day meeting. The decision was largely expected by economists and investors who bet there was very little chance of a move.

“Our decision does not reflect a lack of confidence in the economy,” said Janet Yellen, chair of the Fed. “It’s better to err on the side of caution.”

The Fed downgraded its forecast for economic growth in 2016 for the third time this year. It now projects growth this year to be 1.8%. In June it forecast growth of 2%.

As the Fed has hesitated to raise rates, there is a growing debate about its credibility. Many economists and investors say the Fed’s hesitancy to raise rates — and conflicting messages from its top leaders — has eroded public confidence in the central bank.

There’s a lot more at the original, but no, I wouldn’t say that a projected annual growth rate of 1.8% is exactly an economy that is overheating!

In June of 2015, the Federal Reserve Board of Governors told us that they estimated real GDP growth for 2-16 to be in the 2.4% to 2.7% range, with the range of estimates from all of the Governors being between 2.3% and 3.0%. How did they arrive at those numbers?

Each participant’s projection was based on information available at the time of the meeting together with his or her assessment of appropriate monetary policy and assumptions about the factors likely to affect economic outcomes. The longer-run projections represent each participant’s assessment of the value to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. “Appropriate monetary policy” is defined as the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her individual interpretation of the Federal Reserve’s objectives of maximum employment and stable prices.

FOMC participants generally expected that, under appropriate monetary policy, growth of real gross domestic product (GDP) in 2015 would be somewhat below their individual estimates of the U.S. economy’s longer-run normal growth rate but would increase in 2016 before slowing to or toward its longer-run rate in 2017 (table 1 and figure 1). Participants generally expected that the unemployment rate would continue to decline in 2015 and 2016, and that the unemployment rate would be at or below their individual judgments of its longer-run normal level by the end of 2017. Participants anticipated that inflation, as measured by the four-quarter percent change in the price index for personal consumption expenditures (PCE), would be appreciably below 2 percent this year but expected it to step up next year, and a substantial majority of participants projected that inflation would be at or close to the Committee’s goal of 2 percent in 2017.

Think about that: there are twelve members of the Federal Open Market Committee, and every single one of them projected much higher economic growth than we are seeing; the lowest projection was 2.3% growth, which is a full half percent higher than what the FOMC currently sees, with the year not quite through three quarters. These highly educated economists are supposed to be guiding the US economy — as much as it can be guided, which, in my opinion, isn’t very much — and they are continually getting things wrong. From The Wall Street Journal, July 29, 2016:

Declining business investment is hobbling an already sluggish U.S. expansion, raising concerns about the economy’s durability as the presidential campaign heads into its final stretch.

Gross domestic product, the broadest measure of goods and services produced across the U.S., grew at a seasonally and inflation adjusted annual rate of just 1.2% in the second quarter, the Commerce Department said Friday, well below the pace economists expected.

Economic growth is now tracking at a 1% rate in 2016—the weakest start to a year since 2011—when combined with a downwardly revised reading for the first quarter. That makes for an annual average rate of 2.1% growth since the end of the recession, the weakest pace of any expansion since at least 1949.

So, the economy has been growing at rates far below what the Fed projected, and the statement that the second quarter readings were “well below the pace economists expected” tells us that not only don’t the professional economists know what the economy is going to do, they have problems understanding what the economy has already done.

The Fed wants to tweak the economy into increased growth, but can’t. The Fed wants to see inflation at around the 2% mark, but can’t achieve that, either. The problem is one that the government and the professional economists never want to admit, that the economy is more than two hundred million economic actors taking over a billion economic decisions every single day. There is no way that twelve members of the FOMC, or the President’s Council of Economic Advisors, or the Congressional Budget Office, or Nobel laureate Paul Krugman can anticipate and guide an economic leviathan like that. But part of the problem is that they think that they can, and they keep trying.

The best thing we could do for the economy is to just leave it alone, stop trying to meddle. That might not help, but at least it won’t hurt the economy.

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