Floyd Reports


New Federal Reserve Report: Sorry We Never Get a Forecast Right


By 6 o’clock Friday most of us where either still shopping or relaxing and enjoying the two day holiday Thanksgiving has become. Nevertheless, Lee Adler a Wall Street Examiner reporter, was watching our backs and caught the New York City office of The Federal Reserve whispering an apology over the poor quality of its recent financial forecasts.  Even quasi-government agencies pull this stunt all the time. They dump bad stuff on Friday afternoons, so it gets lost in Saturday’s news cycle – the least read or listened to of the week.

Some of what the Fed report acknowledged follows.

While both public and private analysts were forecasting a weak 1.3% rate of growth in real GDP for 2008, The Federal Reserve office of New York City was promoting its forecast of 2.6% which was over optimistic by a factor of twice the true number.

Since the actual rate of change in the GDP for 2008 is now thought to be a negative 3.3% the Fed’s prediction may have been off by a debilitating 5.9% given necessary calculation adjustments.

The Fed’s confession of incompetence continued to an explanation of how wrong it was in rejecting what should have been convincing evidence of trouble in the housing market. The overvaluation of the real estate market should have raised red flags but it did not. Because of its willful blindness, investors relying on the Fed’s “expertise” where caught unaware of the impending collapse of the housing market with disastrous consequences.

Using “professional” jargon to obfuscate its clear culpability, the report then turned to the Fed’s  having given, “Insufficient weight…to the powerful adverse feedback loops between the financial system and the real economy. Despite a good understanding of the risk of a financial crisis from mid-2007 onward, we were unable to fully connect the dots to real activity until 2008.”

In essence the whispered apology blames “complacency,” as the primary cause of the Fed’s failure to provide the kind of reliable forecasts America’s investors could put to work in growing the economy.

We can only hope that the Chair of the appropriate House Committee will take notice of this apology and do something about it. Auditing the whole Federal Reserve System would be a good first step.

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This article originally appeared on CoachIsRight.com and is reprinted with permission.


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