Fed's November Meeting Minutes Show Varying Opinions

They agree that the economy is improving, but disagree about what that recovery will bring.

There doesn't appear to be much consensus among Federal Reserve governors and presidents about the U.S. economy. Despite the FOMC's decision to take aggressive action to loosen monetary policy earlier this month, the economists' opinions about the current and future path of the U.S. recovery are all over the place. This can be seen by the committee's discussion as well as the new economic forecasts released with the meeting's minutes.

If the Economy Is Improving, Why the Action?

Let's start with the one thing that all of the FOMC members broadly agree on: the U.S. economy is recovering. In a sense, it is somewhat surprising that the only thing all these economists clearly agree on is that the economy is improving; after all, they just voted to expand monetary policy, implying that they don't feel that the recovery is strong enough. Take the following exceprt from the Staff Economic Outlook:

Because the recent data on production and spending were broadly in line with the staff's expectations, the forecast for economic activity that was prepared for the November FOMC meeting showed little change to the staff's near-term outlook relative to the forecast prepared for the September FOMC meeting. However, the staff revised up its forecast for economic activity in 2011 and 2012.

That certainly doesn't sound like a group that would also decide to take aggressive action to stimulate the economy during the same meeting. If the economy was performing as they expected, and they revised their future forecasts upwardly, then why did they feel the need for that action? Another except explains:

Although participants considered it quite unlikely that the economy would slide back into recession, some noted that continued slow growth and high levels of resource slack could leave the economic expansion vulnerable to negative shocks.

So there's little fear of a double dip, unless new negative shocks hit the market. The latest asset purchase plan is meant to strengthen the U.S. economy enough that it isn't vulnerable to that action.

Little Consensus

For some examples of the vast differences among these economists' views, let's look at a few excerpts:

  • On unemployment: "Participants agreed that such (structural) factors were contributing to continued high unemployment but differed in their assessments of the magnitude of such effects."
  • On inflation: "A majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside."
  • On the asset purchase plan: "Several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation ... some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery."

Economic Projections

Indeed, the economists' projections also show a wide range of views about the future of the U.S. economy. Here are a few charts showing change in GDP, unemployment, and inflation:

fed gdp 2010-11 v2.png

You can see that GDP predictions for 2012 vary wildly, ranging from 2.6% to 4.7%. Most of the economists do see GDP slowly rising over the next few years. However, these estimates are slightly below those made in June.

fed unemployment 2010-11 v2.png

Unemployment estimates are also controversial, ranging from 8.2% to 9.3% at the end of 2011. Even the most optimistic prediction sees it at 7% at the end of 2012. The economists generally see unemployment declining very slowly, as most believe it will be above 6% through 2013.

fed pce 2010-11 v2.png

Perhaps the most surprising variety of predictions are with inflation. There is also wide disagreement here. They see it as ranging from 0.9% to 2.2% next year. However, from this data, it appears that the even the economists most worried about the price level still don't see it rising more than 2.2% per year through 2013. That isn't exactly the Zimbabwe-style hyperinflation that some economic commentators are screaming about.

If anything, these minutes reinforce the view that there's an awful lot of uncertainty out there. Even top economists have vastly different opinions about where the U.S. economy is and where it's going. Pretty much the only thing they tend to agree on is that it's improving, but very slowly.