The Outlook: The Fed’s View

The release of the minutes from the Federal Reserve Board’s April meeting gives us an insight into what policy makers are thinking. The view is generally cautious, but sprinkled with possibilities that the end of the recession is in sight.

For instance the Fed’s staff economists note that the pace of decline appears to be easing somewhat, and that the housing industry is showing signs of having hit bottom earlier this year. Industrial production, however, continues to fall sharply, and along with it the employment picture is bleak.

Similarly they argue that the chances of prolonged deflation have diminished, but that the likelihood of sharp inflation is negligible. In fact the prospect for inflation rising as high as the Fed’s 1.75% – 2% target range in the next few years is seen as slim.

This all seems very dry and dull. What to make of it all?

I think the best spin we can put on the Fed’s analysis is that the recession will end sometime later this year, but that 2010 will see only very slow growth. Much better conditions appear to loom in 2011 when growth could rise back up to the more normal levels of 2% – 3%. Employment is still the ugly issue. The Fed is forecasting unemployment to peak at around 9.5%, but improvement will be very slow. It looks as if the unemployment rate will still stay stuck well above 7% right through 2011, even after the economy has started to grow again.

I suppose there’s no real news in any of this because most of the speeches and announcements recently have been consistent with this outlook. Still it is re-assuring to think that this long recession is drawing to an end, and that we have managed to avoid falling any further.

But remember the caution: most of the variability is still on the downside. The risks are heavily weighted toward decline rather than growth. The fragility of banking and the rising tide of unemployment are the two consistent weak spots we need to see eliminated.

And as the Fed points out: solving those two is going to take time.

The economy as we will know it then will be very different from the one we have lived through for the past few decades. Savings and thrift are in; debt and profligacy are out. An economy more akin the 1950’s and 1960’s in other words.

So. Don’t break out the champagne just yet. But the chances of another Depression seem to have gone.

That should bring a smile to your face.