Even if the central bank wants to help, it may have a hard time finding the right justification to do so
This morning we learned that the U.S. economy grew at an annualized rate of just 0.8% in the first half of 2011. That's terrible, by pretty much any measure. Surely, this isn't the recovery policymakers or economists were hoping for. While Washington isn't poised to do much for the economy as partisan politics threaten even the nation's debt rating, the Federal Reserve could. It has the delightful advantage of not having to really answer to anyone. If a majority of its Federal Open Market Committee members agree to provide monetary stimulus, it shall be done. Should the Fed act accordingly now that the recovery looks far weaker than most economists thought?
Projections vs. Reality
For starters, by how much will the Fed's GDP projections change? About a month ago, the central bankers predicted that 2011 GDP growth would be between 2.5% and 3.0%, with the central tendency between 2.7% and 2.9%. So let's say the average estimate was about 2.8%.
But at that time, they also thought that the first quarter's growth was 1.9%. If consensus estimates are any indication, they likely assumed that the second quarter's growth would be similar, if slightly lower. So they had always assumed the second half of the year would be stronger than the first half. If they had assumed that the growth rate would average 1.9% for the first two quarters, then the second half of the year would have needed to average 3.7% to achieve 2.8% growth in 2011.