Posted by: Josh Lehner | August 14, 2014

Graph of the Week: Squaring Fed Policy

With the immediate risk of recession appearing to be small — see the WSJ Economic Forecasting Survey at 12 percent and the Philly Fed’s Survey of Professional Forecasters more like 8 percent — much discussion these days focuses on Fed policy. Most economists and financial market types expect the Federal Reserve to begin raising rates in the middle of next year. However as Tim Duy writes, the exact timing probably does not matter as much as the pace of tightening once it begins. Too slow and inflation may take off. Too fast and the economic recovery, even as weak as it has been, could be choked off. Provided the economy continues to improve and even accelerates somewhat, the Fed will need to manage its exit strategy carefully in order to balance these risks. Arguably the most important part here is the not only the continuation of the recovery but acceleration or a pick up in growth, which brings us to our Graph of the Week

The following compares the Fed’s own forecasts for nominal GDP (actually real GDP + PCE) on a 2 year ahead basis. Most forecasters, including the Fed, have performed relatively well on a 1 year ahead basis but keep calling for an improvement “next year” which has largely not materialized at the national level. Some states, such as Oregon, have seen acceleration in job growth but others have decelerated at the same time leaving U.S. growth at consistent rates.2YrNGDP_0614So what does this mean for policy and the outlook? Well, the Fed’s not alone here in believing 2015 will be better. About half of the Philly Fed survey and also the Blue Chip forecasters expected 2015 NGDP to be 5 percent or stronger, while the WSJ survey shows 60 percent of respondents think this will occur. Certainly a mild improvement like this is not out of the question, however to the extent that wage growth remains subdued and the economic data does not accelerate, it points more toward a slow pace of tightening, if/once it begins. Of course as economic conditions change, one would expect/hope policymakers react accordingly  — both to the up and downside.


  1. HI Josh! How on earth could anyone really think there’s much inflation risk from Fed policy, rather than say, producers playing games with commodities or oil or something?!? That sounds like politics to me…. Best! Mary

    • Thanks Mary for the comment. It is very hard to see any inflation today, or in the past 5 years. More and more folks are getting concerned about future inflation now that the unemployment rate is approaching rates that historically would indicate a tighter labor market. I think most economists agree that sustained wage gains are needed to see anything other than a commodity blip in inflation. However given the slack in the economy, through various other measures beyond headline unemployment, it appears we are still a good ways off from a tight labor market. So, I agree, but paying attention to the data and debate about the amount of slack is important. The biggest concern is that what may have been at first a cyclical decline (even as deep as it was) is now structural after 5 years of sub-par growth.

  2. Outstanding, Josh. I liked the play this got in the blogosphere.

  3. […] economy is getting there, however the recovery is not yet complete. Furthermore, expectations that “next year” will be better have yet to materialize so […]

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