- NEW YORK (Reuters)
-- The Federal Reserve's latest economic forecasts assume a perfect blend
of growth and inflation, but analysts suspect the central bank is heading
for disappointment on both counts.
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- "They are Goldilocks forecasts," said Lehman
Brothers' chief economist and former Fed staffer Ethan Harris.
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- If, instead, growth proves too cool and inflation too
hot, the Fed might have to raise interest rates more quickly, even at the
risk of slowing the economy.
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- In a semi-annual report to Congress this week, Fed Chairman
Alan Greenspan released the forecasts of the central bank's policy-setting
committee, including a prediction that economic growth will reach a robust
4.5 percent to 4.75 percent this year.
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- That figure is well above the 4.0 percent consensus estimate
of 30 economists surveyed by Reuters in a quarterly poll published earlier
this weak.
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- The Fed's forecast implies that, with economic growth
in the first half of the year running between 3.5 percent and 4.0 percent,
gross domestic product would have to accelerate to a bit over 5.0 percent
over the remainder of the year.
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- "That's pretty darned optimistic and it's at the
upper end of range that most economists assume," Harris said.
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- Greenspan conceded this week that the economy had hit
a soft patch in June, but argued that early indicators for July showed
a marked revival in activity.
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- The Fed has had more success predicting growth over the
past year than much of Wall Street. But analysts, not being omniscient,
harbor doubts.
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- "We wonder what the catalyst is that will spark
such a strong acceleration in economic activity?" Merrill Lynch's
chief economist, Dave Rosenberg, wrote in a note to clients.
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- With consumers tiring after three years of robust spending
that helped minimize the recession and speed the recovery, it would fall
to businesses to ramp up investment in equipment and inventories to generate
faster economic growth.
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- STICKER SHOCK
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- The other key plank of the Fed's economic outlook, its
inflation forecast, is harder to compare with Wall Street estimates since
the Fed uses a different inflation measure.
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- It is not even strictly comparable with the Fed's own
previous forecast, since officials have switched from the headline personal
consumption expenditure index (PCE) to the core PCE, which strips out food
and energy costs and is usually well below the headline level.
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- If the Fed had published the same inflation measure,
it likely would have more than doubled from the low-ball 1.0 percent to
1.25 percent estimate for 2004 made in February -- proving the central
bank is no better at forecasting the future than the layman.
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- Some analysts speculated whether policy-makers' worries
about the "sticker shock" of such an inflation forecast may have
prompted the central bank to omit the number this time.
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- "The timing of the switch is opportunistic on their
part, but this is a long talked-about change we are very happy to see,"
said Stephen Stanley, chief economist at RBS Greenwich Capital.
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- The official forecast for underlying inflation, as measured
by the core PCE, is 1.75 percent to 2.0 percent. But this measure has already
doubled so far this year to 1.6 percent and many analysts see it topping
2.0 percent in the next few months.
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- The same economists also believe the Fed has erred on
the side of optimism for next year as well.
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- "Not surprisingly, the FOMC's forecast for 2005
is a very pleasant soft landing story. In contrast, we expect slower growth
and higher inflation relative to the FOMC's forecast," said Bill Dudley,
chief economist at Goldman Sachs.
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