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Federal reserve policy and estimated 2.15% GDP growth

Uncle Ben’s Crazy Housing Sale
Posted by Ezra Klein on July 24, 2012 at 9:14 am
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There’s no mystery as to why Congress is not doing more to help the economy: Disagreements between Republicans and Democrats have paralyzed the institution. In February 2011, congressional gridlock almost shut down the federal government. In August 2011, it almost caused a global financial crisis by breaching the debt ceiling. Markets are beginning to worry — rightly — that congressional paralysis might push the economy over the fiscal cliff in January 2013. At this point, the best we can hope for with Congress is that it will manage not to make things much, much worse. Asking lawmakers to make anything better is like asking them to build a rocket to the moon.
But there’s a real mystery as to why the Federal Reserve is not doing more to help the economy. Ben Bernanke, after all, keeps saying the central bank can do more, and if the economy gets worse, it will do more. But the economy keeps getting worse, and the Fed keeps not doing more.
When I say “the economy is getting worse,” I’m using the Fed’s own data. In January 2010, the Fed projected that that the economy would grow 4.15 percent in 2012. By June 2011, it had revised that down to 3.5 percent. By April 2012, it was down to 2.65 percent. And in June, officials lowered expectations once again, saying they expect economic growth to be a mere 2.15 percent in 2012. Ouch.

Getting gloomy. (Graph: Brad Plumer, Data: Federal Reserve)

Some argue that there’s nothing more the Fed can do. But Bernanke is not one of these people. “I wouldn’t accept the proposition, though, that the Fed has no more ammunition,” he said in June. “I do think that our tools, while they are nonstandard, still can create more accommodative financial conditions, can still provide support for the economy, can still help us return to a more normal economic situation.”

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