FOMC's Economic Outlook: Far From Robust

In its statement released on January 25, the Federal Open Market Committee (FOMC) did not change its position on monetary policy.

Basically, the Fed's assessment is that the economy is growing moderately, with household spending up but business fixed investment slowing and housing still depressed. As for inflation, the Fed remains unconcerned. Looking ahead a bit on jobs, the Fed is looking for the unemployment rate to decline slowly.

But what was notable is the Fed's apparent expectation that a slow recovery will continue for the coming three years. Yes, that's three years.

Specifically, the FOMC statement declared: "[T]he Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."

In Fed-speak, "accommodative" means the Fed is unconcerned about inflation, but worried that economic and employment growth will be lacking.

Looking at the new accompanying economic projections by FOMC members, the central tendency points to a range of real GDP growth for 2012 at 2.2%-2.7%, for 2013 at 2.8%-3.2%, for 2014 at 3.3%-4.0%, and the long range is put at 2.3%-2.6%.

Given that real annual growth since 1950 has averaged about 4.5 percent during recovery/expansion years, the Fed is working under the assumption that an under-performing economic recovery is going to persist for at least three more years. Indeed, real GDP growth, according to Fed expectations, is expected to run lower than the average 3.4 percent rate over the past six-plus decades including recession quarters.

Of course, monetary policy ultimately should be about price stability, and FOMC members naturally are projecting tame inflation. Why would we expect otherwise?

In the end, growth is about private sector investment, innovation, entrepreneurship and productivity. These certainly are affected by monetary policy and inflation - for example, in terms of interest rates, the value of the dollar and the ability to plan - but federal tax and regulatory policies are the measures that have significant and direct impact on incentives and therefore the economy. That's the job of the President and Congress, and according to Fed estimates, we need a dramatic shift in a pro-growth direction on taxes and regulations.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.