Chairman Ben S. Bernanke and his Federal Reserve colleagues are preparing to meet next week as two-year Treasury yields at a record low signal a U.S. economy on the knife’s edge between growth and contraction.
Guiding their assessment of the outlook for the world’s largest economy will be forecasts contained in the so-called Teal Book, a confidential staff report with a blue-green cover. Policy makers’ confidence in those forecasts may be tempered as the course of the expansion has confounded their expectations.
Of 12 Fed staff forecasts since the beginning of 2010, seven have been downward revisions to the near-term outlook, according to minutes of Federal Open Market Committee meetings. This year, the outlook was raised in January and lowered three times since as a stream of data on weakness in employment and consumer spending signaled threats to a recovery from the deepest recession since the Great Depression.
“We haven’t had any historical event that really would allow us to reliably statistically calibrate an event like the one we’ve had,” David Stockton, director of the Fed’s Division of Research and Statistics, who has overseen forecasting for a decade, said in an interview at the end of June. “There isn’t going to be a simple story here.”
Uncertainty can cause central bankers to keep their hands off the levers of monetary policy and wait for more information, said Antulio Bomfim, senior managing director at Macroeconomic Advisers LLC in Washington. When risks to growth stack up, as is the case now, Fed officials have to be mindful of more severe scenarios rather than just their baseline outlook, he said.
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