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The Democratic Fed: Shaky Prognosis
The U.S. Federal Reserve Board, in keeping with its new policy of openness and transparency, has published a forecast for the development of the American economy lowering the prognosis for the growth of the economy in 2008 from 2.5-2.75 percent to 1.8 percent. That would be the worst indicator since 2002, but the Fed claims that it will not be a recession. After the forecast was released, the dollar fell from $1.47 to against the euro to $1.49 and oil hit a new record high at $99 per barrel. U.S. trading partners in Europe began saying that it is time to solve the dollar's problems, and its Asian partners began talking about getting rid of the currency altogether.
The Naked Truth
Bernanke promised to “provide a more timely insight into the committee's outlook, [which] will help households and businesses better understand and anticipate how our policy decisions respond to incoming information and will enhance our accountability for the decisions we make'' in the days before the disconcerting information was released. The new policy will be to publish economic prognoses quarterly instead of annually, as they have been made since 1979. Bernanke also said that the reports should reflect the “distribution of participants' projections and how that distribution has changed” among board members.
The Federal Reserve Board prognoses will now include consumer and base inflation, the growth rate of the real GDP and the level of unemployment. The time span of the forecasts has been increased from two to three years. The board's materials will now not only contain a consolidated outlook, but the individual expectations of the board members and presidents of the reserve banks as well. For example, the Fed's November 20 publication revealed that its October 31 decision to lower the interest rate from 4.75 to 4.5 percent passed by a vote of 9 to 1. Chairman of the Reserve Bank of Kansas City Thomas Hoenig dissented. According to the minutes of the meeting, Hoenig considered the 4.75-percent interest rate “close to neutral” and “policy needed to be slightly firm to better hold inflation in check.”
So far, the new democratization of the Fed has not reversed the negative trends in the American economy.
The board slightly raised its forecast of the U.S. GDP next year (from 2.25-2.5 to 2.4-2.5 percent), claiming that “economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.” In spite of that, the economic growth rate for 2008 was sharply curtailed, from 2.5-2.75 to 1.8-2.5 percent due to “tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than-expected housing data, and rising oil prices.”
In addition, predicted inflation for this year was raised to 2.9-3 from 2-2.25 percent. That increase was made in two stages. On November 8, the prognosis was raised from 2 to 2.6 percent, and now it has been boosted all the way to 3 percent annually. Rising inflation is impossible not to notice, especially when gasoline increases in price by 18 percent in a year and the Fed lowers the interest rate by 0.75 percent and looks like it won't stop there.
War of the Worlds
If the forecast comes true, 2008 will be the worst year for the U.S. economy since 2002, when growth was just 1.6 percent. Of course, there was no obvious recession or negative GDP in 2002, as there was in 2001 (-0.8%) or 1991 (-0.2%). Nonetheless, 2002 is considered a continuation of the recession that started in 2001. Even more similar to the forecast for 2008 is 1990 (1.7% GDP), when the United States was not leaving a recession, as in 2002, but entering one. But they do not talk about recession in the respectable company of the board members, and certainly not about a recession in 2008. But 10 percent of respondents to a Bloomberg survey on world financial markets are talking about it. After the publication of the Federal Reserve Board forecast, world stock markets, including the Russian stock market, fell 1-3 percent. The only market that was left untouched was the American market. It receive some sort of definition. The dynamics of the world markets is evidence of lingering fears about a recession in the U.S.
The dollar's sharp plunge was also a result of the Fed prognosis. A euro now costs $1.49, up from $1.47, and soon, as the classical Russian writer Saltykov-Shchedrin said, “They'll give to it right in the nose.” He said that a hundred years ago about the ruble, but it echoes the sentiments the French feel about the dollar today, try as French President Nicolas Sarkozy might to be politically correct.
Speaking to the U.S. Congress on November 12, Sarkozy warned, “The dollar cannot remain someone else's problem. If we are not careful, monetary disarray could morph into economic war. We would all be its victims. Those who admire the nation that has built the world's greatest economy and has never ceased trying to persuade the world of the advantages of free trade expect her to be the first to promote fair exchange rates.''
The French president has good reason for such statements. The large European company Airbus, for example, loses ˆ100 million on every cent the currency gains against the dollar. The company has lost ˆ1.2 billion since August and the French national budget has lost the taxes on that amount. But analysts already consider the dollar's fall irreversible and expect it to stabilize around $1.60.
While America's friends in Europe are not talking about economic war yet, less friendly states are less shy about it. On November 12, vice chairman of the Chinese National People's Congress Cheng Siwei said that China “will favor stronger currencies over weaker ones, and will readjust accordingly.” China has reserves of $1.34 trillion in foreign currency, mostly U.S. Treasury notes.
On November 21, after the appearance of the new Fed prognosis, governor of the Dubai International Financial Center Omar Bin Sulaiman reported that the Central Bank of the United Arab Emirates was serious considering untying its national currency from the dollar.
Oil, meanwhile, is reaching new highs with the dollar weakened. At press time, a barrel of Brent cost $99, and no one will be surprised if that price reaches $100 before the newspaper reaches the streets. One-month oil futures are already trading higher than that, although three-month futures have yet to reach that mark.
So it is the right time for the Russian private investor to turn his attention to the Russian oil companies and companies in the consumer sector. The falling dollar makes imports cheaper and more profitable.
Changes to the U.S. FRB Forecasts: Nov. 20 vs. June 16, 2007
| FRB Forecast | For 2007 | For 2008 | For 2009 | For 2010 |
|---|
| GDP (%) | Infla-tion (%) | Unem-ploy-ment (%) | GDP (%) | Infla-tion (%) | Unem-ploy-ment (%) | GDP (%) | Infla-tion (%) | Unem-ploy-ment (%) | GDP (%) | Infla-tion (%) | Unem-ploy-ment (%) |
|---|
| June 16, 2007 | 2,25-2,50 | 2,00-2,25 | 4,50-4,75 | 2,50-2,75 | 1,75-2,00 | 4,75 | | | | | | | | Nov. 20, 2007 | 2,40-2,50 | 2,90-3,00 | 4,70-4,80 | 1,80-2,50 | 1,80-2,10 | 4,80-4,90 | 2,30-2,70 | 1,70-2,00 | 4,80-4,90 | 2,50-2,60 | 1,60-1,90 | 4,70-4,90 | |
Maria Glushenkova, Pavel Chuvilyaev
All the Article in Russian as of Nov. 26, 2007
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