Fed policy hinges on questionable projections

June 17, 2013 at 12:42 PM
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NEW YORK, June 17 (UPI) -- A monthly survey of U.S. economists found concern the Federal Reserve would adjust monetary policy based on inaccurate growth projections.

The Wall Street Journal reported Monday its monthly survey of 52 private sector economists indicated an average expectation of gross domestic product growth of 2.3 percent for 2013 and 2.8 percent for 2014.

With those numbers, the group's forecast is more pessimistic than the most recent Fed prediction of 2.6 percent GDP growth for 2013 and 3.2 percent for 2014.

As it happens, the Fed has been more optimistic than the economists polled by the newspaper since end of the last recession, the Journal said.

The Fed's predictions were issued in March. Updated Fed projections are scheduled for release Wednesday after a two-day policy meeting.

Fed Chairman Ben Bernanke in recent testimony on Capital Hill said the central bank's Open Market Committee members would consider pulling back on its long-term asset purchasing program within the next few Fed meetings.

That move would have a quick impact on interest rates for personal and commercial loans, which are being suppressed by the program, which is called Quantitative Easing.

Not only would interest rates for long term loans rise, but the bond yields would likely rise, as well, as yields in the bond market head the opposite direction of price.

If the Fed pulls back on their $85 billion per month in asset purchases, the demand for bonds would drop, causing prices to fall and yields to rise.

BNP economist Julia Coronado said the Fed would likely be very careful unwinding policies that have propped up the recovery.

"I don't think that most people on the [Open Market] committee will be comfortable tapering against a slowing [recovery] backdrop," Coronado told the Journal.

"They're going to want to see a stronger run of data before they take that first step," Coronado said.

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