Lots of commenters make a big deal about the fact that some Fed officials, and Ben Bernanke in particular, often make statements implying that they don’t engage in monetary offset. One response is that they also make statements implying that they do engage in monetary offset. Talk is cheap, and there’s no doubt the Fed would prefer that Congress do more of the heavy lifting, so they could do less (and hence be less controversial.)
But actions speak louder than words. How does the Fed change its forecast of RGDP growth in 2013, as a result of the big tax increases plus sequester? Take a look at the following, from The Economist:
Lots of people have noticed that actual GDP growth accelerated in 2013, as compared to 2012, despite all the austerity we were warned about. But of course lots of unexpected things can happen over a 12 month period. I find it much more interesting to look at the expected effect of austerity. Notice that expected 2013 growth is identical to expected 2012 growth.
Now some will argue that that’s only because other things were changing to offset the effect of austerity. For instance, the Fed did QE3 and forward guidance in late 2012.
Which is exactly the point.
PS. In fairness, I’m not sure how fully they understood the extent of fiscal austerity in their December 2012 forecast. They did cite looming fiscal austerity when justifying their monetary stimulus of late 2012, so it was clearly understood that austerity would occur. But in March they lowered their RGDP growth forecast from 2.65% to 2.55%, perhaps because of more information about the severity of the austerity.
The Fed lowered its GDP forecast slightly downward in the March FOMC meeting
The Fed is forecasting from 2.3% to 2.8% in GDP growth for 2013, taking down the top end of the range from 2.3% to 3.0%. The Committee noted that the private economy was growing a little faster than anticipated, and that would nearly offset the fiscal drag imposed by the Jan 1st tax hikes and the sequester. They did adjust their 2014 and 2015 forecasts lower as well, although not dramatically.
On the other hand Q1 growth was very weak, so it seems equally likely that that triggered the downgrade in forecasts, not the sequester. Fiscal austerity might or might not have lowered the Fed’s growth forecast by 10 basis points. That’s far from the apocalyptic forecasts of the Keynesians.