Federal Reserve officials predicted three bleak years for the U.S. economy, and the Federal Open Market Committee announced today that it intends to keep short-term interest rates extremely low until 2014 amid a pondering economic recovery.
In a twist that's both ironic and totally expected, the announcement that the economy will stink for the next three years improved the very, very short term prognosis of the recovery, since the promise of long-term low interest rates coincided with (and probably helped to cause) the bump in stock prices immediately following the FOMC announcement.
The FOMC doesn't have a perfect track record for predicting the future. After all, in early 2006, it anticipated two years of smooth sailing for the U.S. economy, and we all know what happened in the next two years. But it's worth taking a peak at FOMC predictions, via the San Francisco Fed, to understand why the FOMC is confident that inflation will stay put with interest rates guaranteed to kiss zero percent for the next two years.
A note on reading the graph: The dark blue band represents the "central tendency of projections" and the light blue band represents the full range of projections.
The upshot is that Fed officials believe the economy will hit 3% to 4% yearly growth in the next three years. That's better than we're expanding now, but it's still worse than most recoveries from past recessions.
Where did the inflation vigilantes go? FOMC members predict PCE inflation to fall in 2012, as energy prices cool off, and hold steady for the next two years.
The unemployment rate is projected to fall steadily over the next three years, with most predictions putting the official rate around 8 percent at the end of 2012 and 7 percent at the end of 2014, fully seven years after the recession officially began, in December of 2007. Even more concerning: The longer-run rate is projected to stay elevated near 6 percent, 2 percentage points higher than our unemployment in the middle of the last decade.
The numbers above each column represent the tally of FOMC members who said they want to reverse monetary policy -- i.e.: raise the federal funds rate -- in a given year. Six FOMC members said they wanted to raise interest rates before 2014 and another six said they didn't want to raise rates until after the end of 2014.
The dots above each year represent FOMC members voting to raise interest rates (listed along the Y axis) in each year (along the X axis). All 17 participants said they wanted the target rate to remain at 1 percent or lower this year. By the end of 2014, six members said they expect to want the federal funds rate to rise above 1 percent.