Surprise, the Fed again overestimates growth

The first quarter NGDP growth numbers are in, and they show about 0.1% annualized growth.  The Hypermind full year forecast fell from 3.8% to 3.6% on the news.  I doubt if we’ll even hit 3.6%, which would require nearly 4.8% annual growth for the final three quarters of the year.

The Fed seems anxious to raise interest rates this year, but I’m having trouble understanding what “problem” this is supposed to solve.

Overheating?  Expected future overheating?

Or is this urge a sort of atavistic gesture, like an arm or leg that suddenly jerks after being still for too long?  Are they planning to raise rates because . . . well because it’s the job of central banks to move interest rates to and fro?

The new and improved modern Fed says they will be “data driven.”  OK, what do they learn from the fact that the economy is once again underperforming their expectations?




16 Responses to “Surprise, the Fed again overestimates growth”

  1. Gravatar of Libertarian Conservative Libertarian Conservative
    29. April 2015 at 06:16

    If the Fed screws up this already poor recovery, at least it’ll boost the chance of someone like Rubio winning, since the public will just blame the Obama Administration. Still, it’s frustrating to see them not learning from the mistakes of the ECB.
    On a side note, should there be a QE4, or do they just need to stop hinting at rate raising in order to get NGDP back on a reasonable path?

  2. Gravatar of Kenneth Duda Kenneth Duda
    29. April 2015 at 07:01

    > should there be a QE4…

    What there *should* be is a regime change, where the Fed announces a clear target, an intent to do anything it takes to hit that target, and then acts accordingly. Today, no one knows what the Fed is trying to accomplish, so it’s hard to predict what the Fed should do. Is 2% PCE inflation a target? Or a ceiling? How does the Fed trade that target against its mandate of full employment? If employment is too low, how much above its 2% PCE inflation target would the Fed be willing to go? The answer seems to be zero, but at other times the Fed has signaled a willingness to let inflation go as high as 2.5%. The bottom line is, no one knows.

    Given that, QE is basically ineffective, because if everyone assumes the cash injection is temporary and will be removed as soon as inflation approaches 2%, the cash injection will have little or no effect — people will sit on the cash, prepared to give it back at a moment’s notice.

    A regime change like NGDP level targeting would make all the difference. Then the markets would know exactly how much of the QE cash injection is permanent — exactly the amount needed to reach the Fed’s chosen level of NGDP. Inflation, unemployment, and interest rates would all shake themselves out from there.


  3. Gravatar of Jesse Irwin Jesse Irwin
    29. April 2015 at 07:21

    Wow, when I heard about it this morning I thought they were talking about RGDP, not NGDP! That is crazy. Could this be in part because the market is anticipating the rate hike?

  4. Gravatar of james in london james in london
    29. April 2015 at 07:29

    NGDP growth in 1Q15 wasn’t so bad. The rest of the world looks at YoY figures not annualised, noisy, single quarters. Multiplying one quarter’s change (in a preliminary estimate of a very large number, always subject to revision) by four is pretty crazy.

    NGDP growth rose YoY to 3.9% in 1Q15 up from 3.7% in 4Q14 – due to the noisy, and even worse, 1Q14 dropping out of the numbers.

  5. Gravatar of Scott N Scott N
    29. April 2015 at 07:30

    The Atlanta Fed almost perfectly predicted today’s GDP report. It predicted 0.1% GDP growth in 2015:Q1 versus the actual number of 0.2%.

    The Atlanta Fed has shown some interest in predicting GDP so maybe you need to go pitch your NGDP futures market idea to Dennis Lockhart and his staff. Who knows, it might be something they would be interested in doing.

  6. Gravatar of Mike Sax Mike Sax
    29. April 2015 at 08:15

    However,isn’t 1st quarter GDP usually a laggard? It has been the last few years-last year it was negative 2.9%

  7. Gravatar of Capt. J Parker Capt. J Parker
    29. April 2015 at 08:16

    Wright understood economics, in particular he understood consumer surplus. When challenged by newspaper man Herbert Jacobs to design an “affordable” house Wright asked him: “Do you really want a $5,000 house? Most people want a $10,000 house that costs $5,000.”

  8. Gravatar of Cameron Cameron
    29. April 2015 at 08:30

    Don’t pay too much attention to this number, as Mike Sax said, first quarter GDP has been consistently underestimated for some reason.

    “Since 2010, first-quarter gross domestic product growth has averaged a seasonally adjusted annual rate of 0.6%. For all other quarters, it’s 2.9%. That’s worked out to slow but steady growth and a bit of a puzzle for some economists.”

    The trend actually extends back to the mid 1980s, so its not even a recent phenomenon.

  9. Gravatar of Sam Sam
    29. April 2015 at 08:34

    If the Q1 underestimation really goes back to the mid ’80s (about half the timeseries), it’s insane that the X13-ARIMA seasonal adjustment hasn’t picked up on it. Something must be misspecified in the seasonality model?

  10. Gravatar of Cameron Cameron
    29. April 2015 at 08:48

    Here’s the news report I was referencing Sam.

    Something does indeed seem to be wrong with seasonal adjustments. The issue seems even more pronounced since 2010.

  11. Gravatar of foosion foosion
    29. April 2015 at 09:27

    >>I’m having trouble understanding what “problem” this is supposed to solve.>>

    There’s a risk workers might get raises.

  12. Gravatar of Major.Freedom Major.Freedom
    29. April 2015 at 17:16

    Inflation, as Bernanke explained on his blog, typically has a long and variable lag of about 3 quarters to a year.

    Plus they don’t look at NGDP, or Hypermind.

    The Fed works for bankers and politicians, not the proletariat.

  13. Gravatar of ssumner ssumner
    29. April 2015 at 19:32

    Ken, That’s right.

    James, Yes, but strong growth in 2014 doesn’t mean the first quarter wasn’t bad. (Even if the rest of the world measures it differently.)

    Everyone, A lot of you seem to be citing RGDP data, this post is about NGDP.

  14. Gravatar of Mike Sax Mike Sax
    30. April 2015 at 03:27

    But the reason the NGDP number was low was because of RGDP which always lags the rest of the year.

  15. Gravatar of David de los Ángeles Buendía David de los Ángeles Buendía
    30. April 2015 at 06:41

    Dr. Sumner,

    The Federal Reserve Bank (FRB) is frightened. It is being haunted by the specter of secular stagnation. They are afraid that the economy of the United States will end up little different from Japan’s, in a permanent state of economic malaise with little capital formation, little growth, falling prices, and falling wages. They very much want the US economy to “lift-off” soon. Raising interest rates, or even talking about raising interest rates, sends the signal to the markets that lift-off around the corner. This is more about “Forward Guidance” than anything else.

    Actually, FRB has been testing out a variety of new programmes in anticipation of “lift off”. They have created a new Term Deposit Facility [1] which “will facilitate the implementation of monetary policy by providing a new tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions”[2]. They also created the new Term Reverse Repurchase Agreement [3] which is based in the New York FRB. So the FRB has taken a number of concrete steps to facilitate a change in monetary policy. The FRB needs *act* as it is expecting lift-off so the markets will act as if they are expecting lift-off. If the FRB does not raise interest rates, and does not create new “facilities”, then everyone knows that the FRB does not really “believe” in no lift-off.

    “See, we are acting normal. We are doing all of the things normal central banks do when their perfectly economy is growing in a normal fashion. Look about and see how normal everything is. You should act normal as well because everyone will make profits when we are all normal.”



  16. Gravatar of ssumner ssumner
    30. April 2015 at 19:24

    Mike, You said:

    “But the reason the NGDP number was low was because of RGDP which always lags the rest of the year.”

    Aren’t you confusing cause and effect?

    David, I don’t think this is the sort of “forward guidance” the markets are looking for.

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