New Fed format does not forecast recession

The Fed has provided its new US economy forecasting format. This forecast will be presented to the public four times a year. The increased level of information is an effort by Chairman Bernanke to enhance the transparency of the Fed. The new format is easy to read and provides detailed information on the dispersion of forecast opinions within the Fed. The dispersion of opinion is useful information on whether there is a consensus within the Fed.

http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20071031.pdf

Without making a value judgment on the quality of the forecast, the reader can see a Fed with a central forecast of slower growth in 2008. Growth is going to be below trend for the next two years, but there is no suggestion of a recession. Inflation is expected to moderate to levels which are at approximately the Fed target of 2 percent. There are clear differences of opinion with more risks to the downside for the economy, but there is a view similar to those expressed by private economists of a “Goldilocks” economy of slow growth and controlled inflation. However, that was the consensus pre-credit crunch. Clearly, it is hard to get an economy to show negative growth. The US economy is more diversified than in the past so there usually are some sectors which will take up the slack of underperforming industries or regions.

There is no financial doomsday for this economy from a credit crunch; consequently, Fed cutting interest rates ahead of the curve does not seem to be in the cards. There seems to be a significant disconnect between what Wall Street economists are thinking and the Fed. The bond markets and dollar are giving us a strongly different view.