Risks associated with developments in Europe, the so-called fiscal cliff here in the United States, and a global economic slowdown have weighed more heavily on our outlook
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In reaction to all this, we recently downgraded our official forecast to one of weaker growth and slower progress on unemployment. This was the perspective I took to the June FOMC meeting.
We were not alone. All 19 FOMC participants submit forecasts for GDP growth, inflation, and employment four times each year. The central tendency for 2012 GDP growth dropped from a range of 2.4 to 2.9 percent in April to a range of 1.9 to 2.4 percent in June. In my view, this was a rather abrupt and material adjustment to the outlook.
In recognition of this change of outlook, the FOMC decided last month to extend the so-called Operation Twist program until the end of 2012. This program is aimed at putting downward pressure on long-term interest rates. This is accomplished by purchasing additional longer maturity Treasury notes while simultaneously selling short-term Treasury bills with the effect of moving out the average maturity of the Fed's portfolio. I supported this decision.
It's possible another policy decision looms. My colleagues and I on the FOMC may confront a decision on whether or not to respond more aggressively to the economy's apparent weakness.
At the risk of oversimplification, there are in broad terms two schools of thought related to this issue of further aggressive monetary stimulus in the near term. One point of view is the outlook as-is calls for further policy action now or before too long. A second point of view is that further aggressive monetary stimulus—while definitely an option that cannot be dismissed—should be held in reserve to respond to a sharp further deterioration in the outlook.
In reaction to all this, we recently downgraded our official forecast to one of weaker growth and slower progress on unemployment. This was the perspective I took to the June FOMC meeting.
We were not alone. All 19 FOMC participants submit forecasts for GDP growth, inflation, and employment four times each year. The central tendency for 2012 GDP growth dropped from a range of 2.4 to 2.9 percent in April to a range of 1.9 to 2.4 percent in June. In my view, this was a rather abrupt and material adjustment to the outlook.
In recognition of this change of outlook, the FOMC decided last month to extend the so-called Operation Twist program until the end of 2012. This program is aimed at putting downward pressure on long-term interest rates. This is accomplished by purchasing additional longer maturity Treasury notes while simultaneously selling short-term Treasury bills with the effect of moving out the average maturity of the Fed's portfolio. I supported this decision.
It's possible another policy decision looms. My colleagues and I on the FOMC may confront a decision on whether or not to respond more aggressively to the economy's apparent weakness.
At the risk of oversimplification, there are in broad terms two schools of thought related to this issue of further aggressive monetary stimulus in the near term. One point of view is the outlook as-is calls for further policy action now or before too long. A second point of view is that further aggressive monetary stimulus—while definitely an option that cannot be dismissed—should be held in reserve to respond to a sharp further deterioration in the outlook.
Output Gap
The Congressional Budget Office (CBO) regularly publishes one popular estimate of the output gap in the United States. To give you a reference point, they estimate the gap today is 5.5 percent. That is, the level of U.S. GDP is 5.5 percent below its potential. Five-and-a-half percent is a very large number, and it has changed little over the past two years. The bulk of the June projections for GDP growth reported by FOMC participants, including my own, imply very little progress in moving GDP toward potential in the foreseeable future. In any event, a quick return to what the CBO would calculate as the potential level of GDP is just not happening.
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