Thursday, March 17, 2022

Who is doing Fed forecasts? These are divorced from reality


What are the best economic minds at the Fed thinking? We might get a decline in real GDP of less than one percent by 2024, and we will get no change in the range of unemployment between now and 2024. This will occur with Fed funds being at 2.8 by the end of 2023. We will see no change in unemployment for 2022 and 2023, the same as December projections which had Fed fund median rates for the dot plot 100 bps lower.  

Few investors make important decisions based on Fed projections of unemployment and GDP, but it suggests that the Fed is divorced from reality. They expect 2022 inflation to come in at 4.3 which means that nominal GDP will be above 7 percent. The Fed is saying that even with a slowdown from 2.8 to 2 in GDP, PCE inflation from 4.3 to 2.3, and rates from current levels to 2.8 by end of 2023, there will only be an increase in unemployment of .1%. No pain for employment regardless of 9 hikes between now and end of 2023. Can you see markets believing this story?

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