When the Federal Open Market Committee meets, the entire financial world watches.
The FOMC, consisting of the seven governors of the Federal Reserve Board and five presidents of regional Federal Reserve Banks, sets U.S. interest rate targets by its control of monetary policy.
The members rely on the latest economic data to decide on policy.
However, the FOMC has some of the same uncertainty as everyone else in forecasting the economy, said Michael Bryan, senior economist at the Federal Reserve Bank of Atlanta.
“We don’t know exactly how the economy is going to unfold,” he said Tuesday at a meeting of the Economic Roundtable of Jacksonville held at the Atlanta Fed’s Jacksonville branch.
Bryan is one of the people who supplies data and forecasts to the FOMC, but he admits it is difficult to predict the economy and said private analysts are not any better than Fed economists.
“I know they can’t forecast the economy,” he said.
Bryan showed a graph of quarterly economic forecasts over the last decade, which included predictions of continued steady growth in 2008 — when the economy actually fell into a deep recession.
“The greatest economic collapse in the last 80 years, they never saw it coming,” he said.
Bryan joked he does offer some value to the Fed with his forecasts.
“I’m not completely worthless. I can beat a coin flip,” he said.
His main value is “risk evaluation,” meaning he can outline the risks to economic growth on the horizon, he said.
Bryan said he’s not “scared” of the current economic outlook but he’s “apprehensive,” and he used a bit from an old “Three Stooges” film to explain the difference.
When one Stooge asked another the difference between scared and apprehensive, he said “it means you’re scared with a college education,” Bryan said.
“That’s where I’m at right now,” he said.
There are some positive signs in the U.S. outlook.
“If you want to see strong growth in the economy, turn to the U.S. labor market,” Bryan said.
Besides falling unemployment, labor force participation is rising, indicating that workers who were formerly discouraged are re-entering the work force and seeking jobs again.
However, “the global situation does not look robust and does not appear to be getting stronger,” he said.
Global weakness hurts U.S. manufacturers who ship goods overseas, which can be offset if domestic demand remains strong, Bryan said.
Unfortunately, “the incoming numbers suggest consumer spending is weakening,” despite positive indicators of consumer confidence and personal income, he said.
“They’re (consumers) taking all this good news and running up their savings rate,” instead of spending, which drives the U.S. economy, he said.
Bryan also said businesses are pulling back on their investment plans, with about one in five surveyed by the Fed saying they are cutting back on their investment spending.
The general consensus of FOMC members right now is they expect to raise interest rates twice this year, four times next year and five times in 2018, which would get short-term rates close to “normal,” he said. However, that could easily change if economic growth slows down.
“The data has to come in to support their forecasts,” Bryan said.
“This appears to be an economy that, for whatever reason, is a long way from its potential,” he said.