Is the Fed Too Conservative in Growth Forecasts? - WSJ Your Money Briefing

Summary4 min read

WSJ Your Money Briefing: “Is the Fed Too Conservative in Growth Forecasts?”

Date: March 27, 2018
Host: JR Whalen (B)
Guest: Justin Lahart (C), Wall Street Journal “Heard on the Street” columnist

Episode Overview

This episode explores whether the Federal Reserve is underestimating economic growth in its latest projections, especially considering the recent surge in fiscal stimulus from tax cuts and increased government spending. Host JR Whalen discusses with WSJ columnist Justin Lahart why the Fed’s revised GDP forecasts might seem conservative, whether this caution helps prevent market shocks, and how the Fed’s humility in forecasting shapes its decisions on future interest rates.

Key Discussion Points & Insights

1. Backdrop: The Fed’s New Projections

Following significant tax cuts and increased government spending, the Fed raised its GDP forecast for 2018 and 2019—yet some observers think the jump doesn’t match the scale of incoming stimulus.
Fed’s median GDP forecast:
- 2018: 2.7% (up from 2.0% in September 2017).
- 2019: 2.4% (up slightly from previous 2.0%).

2. Why the Jump Looks Modest

Despite “a huge increase in government spending,” the GDP growth projections remain relatively muted.
Multiplier Effect:
- Robert Barbera (Johns Hopkins) calculated the fiscal multiplier on 2018 stimulus is only about 0.45—$1 in translates to 45 cents in growth. For 2019, it's just 0.2 (20 cents per $1), “not very much.”
- “That’s a pretty low multiplier for all the money that’s coming in.” (03:43, Justin Lahart)

3. Risk of Overheating and Rate Hike Implications

The combination of low unemployment and strong stimulus could “overheat the economy,” potentially forcing the Fed into more rapid rate increases than projected.
Still, the Fed is not currently forecasting more frequent rate hikes than previously anticipated.
“Either you’re going to get stronger growth, or you’re going to get more rate increases—or maybe you’re going to get a little bit of both.” (05:05, Justin Lahart)

4. Conservatism and Caution in Fed Forecasting

Fed may purposely be conservative to avoid spooking markets by overshooting projections.
There’s “inherent caution” from Fed officials due to previous disappointing recoveries.
Persistent low inflation, despite repeated overestimation by the Fed, also breeds this caution.
“There’s sort of an inherent caution given how disappointing the economy has been throughout this recovery.” (06:02, Justin Lahart)
“They’ve been overestimating inflation for a while…I guess they’re learning from the scars they have and that’s why they pull back on their projections.” (06:41, JR Whalen)

5. Unemployment and Unusual Labor Market Dynamics

Unemployment rate is at 4.1% and could drop further with continued growth—“seeing a three handle [i.e., unemployment in the 3% range]...that seems like a startling number.”
Surprisingly, wage increases and inflation haven’t materialized as much as expected.
“You’d think that would cause some wage increases, justify higher rates, but that isn’t quite happening right now.” (06:50, Justin Lahart)

6. Fed’s “Wait and See” Philosophy

Stemming from policies under former Chair Janet Yellen, the Fed emphasizes waiting for proof of trends before acting, rather than relying solely on forecasts.
“We’re going to wait until we see it before we do something.” (07:41, Justin Lahart)
The Fed’s current posture: if stronger growth or inflation materializes, they’ll “go ahead and do it”—raise rates further—but won’t front-run forecasts.

Notable Quotes & Memorable Moments

On the multiplier:
“The multiplier is basically how much bang for the buck you get from a fiscal package...for every dollar you put into the economy, you get 45 cents worth of growth. That’s not very much.”
(03:43, Justin Lahart)
On unemployment:
“The unemployment rate is at 4.1%. If we’re going to have any kind of growth for much longer, it seems like it’s going to go below four. That seems like a startling number.”
(06:50, Justin Lahart)
On the Fed’s cautious DNA:
“It seems to be a part of the DNA of the Fed...going back to the Janet Yellen tenure, when messages from the Fed were a little bit conservative.”
(07:22, JR Whalen)
On humility in forecasting:
“People have been so wrong in their forecasts about the economy that maybe there’s a little more humility now.”
(07:41, Justin Lahart)

Timestamps for Key Segments

| Timestamp | Topic | |-----------|-------| | 00:33-03:02 | Introduction & setup of Fed’s latest GDP projections | | 03:02-03:43 | Explaining modesty in the Fed’s projections post-stimulus | | 03:43-05:05 | Multiplier effects and skepticism about impact of fiscal stimulus | | 05:05-06:02 | Risks of overheating and interest rate hike dynamics | | 06:02-06:50 | Fed’s philosophical caution and persistent low inflation | | 06:50-07:41 | Labor market surprises and unemployment below 4% | | 07:41-08:44 | Janet Yellen’s “wait and see” approach and Fed humility |

Final Takeaway

The episode suggests that while economic fundamentals and stimulus might point to stronger growth and perhaps higher inflation, the Fed’s conservative forecasts reflect both humility and caution forged during a slow, often disappointing recovery. The current approach appears to prioritize stability and flexibility: rather than front-running optimism, the Fed stands ready to adjust if and when the data prove acceleration is real.

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Transcript17 lines

[00:01]
A
Still running global payroll like a relay race Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP Netsuite operate like a local everywhere. Visit d e l.com WSJ that's d e e l.com WSJ your money briefing
[00:33]
B
Money and market stories from the Wall street journal. I'm J.R. whelan in New York. Some feel the Federal Reserve was too conservative in its GDP projections last week, considering the amount of stimulus about to enter the economy. Details on that in a moment. But first, these money items you should know about. The Wall Street Journal markets team says refinancings make up a smaller portion of the mortgage business than at any time in the past two decades, and that poses a challenge for lenders who already fear higher interest rates and climbing house prices could eventually depress purchase activity. Now, while purchase activity has climbed steadily from a post financial crisis peak in 2011, growth in 2017 wasn't enough to offset a $366 billion decline in refinancing activity. Last year, 37% of mortgage origination volume was because of refinancings. That's the smallest proportion since 1995, and the number of refinancings is widely expected to shrink. The Journal's Streetwise team says there is no upside for investors if they bet on a trade war. Streetwise reporter James McIntosh says the clearest winners from global trade have been Germany, Japan, South Korea and Singapore. Yet when President Trump announced $60 billion of tariffs on China last week, those stock markets beat the s and P500 in dollar terms. McIntosh says if President Trump is serious about trashing the global trading system, there are few places investors can hide. Stocks will suffer, the economy will slow and and inflation will pick up. And the Journal's wealth management team says oftentimes consumers make a deal with a financial advisor and the fees far outweigh the services actually needed. On WSJ.com, reporter Michael Pollack suggests six questions that consumers should be asking, including is there a discount on fees? And Do I really need all your services in the first place? This is your money briefing from the Wall Street Journal. Welcome back, everybody. The Federal Reserve gives Wall Street a fairly clear picture of how it views the health and the trajectory of its projections data like inflation, unemployment and the number of times it expects it might make changes in interest rates. But do the Fed's latest projections properly Account for lots of fuel about to enter the economy. Wall Street Journal Heard on the Street. Columnist Justin lehart is here to discuss. So, Justin, the Fed raised its growth forecast last week, and it raised its GDP outlook for this year and next. But people you spoke with feel the Fed is being a bit modest in terms of the degree of growth that's coming on the horizon.
[03:03]
C
Sure. If you think about where we are right now compared to, let's say, where the Fed was in September. Back in September, we didn't know that we were going to get the tax cut, and we didn't know about this huge increase in government spending that we're going to get now. The Fed knows that. But if you look at the difference between their forecasts from September and their forecasts now, there is an increase in GDP growth, but maybe not as much as you would expect, given how much money is crashing into the economy.
[03:32]
B
And so the median forecast and their projections from The Fed showed 2.7% GDP growth this year. That's a big jump from what they were saying in September, which was 2%.
[03:43]
C
Yeah, it seems like a big jump, but again, considering how much money is coming into the economy, it is not that big a jump. So one calculation that Robert Barbera from Johns Hopkins University did, his suggestion, what he saw was the multiplier on the stimulus for this year seems to be about 0.45. So let me explain what a multiplier is. So the multiplier is basically how much bang for the buck you get from a fiscal package, from a tax cut, from anything like that. And if it's 45, that means that for every dollar you put into the economy, you get 45 cents worth of growth. That's not very much. Then Bob also looked at his 2019 projections, and that suggests that it's about 0.2. So 20 cents on the buck. Again, not very much. So that's a pretty low multiplier for all the money that's coming in.
[04:42]
B
The Fed said it sees GDP growth in 2019 at 2.4%, a little bit of an inching higher than what it had previously said was 2%. And in your Hurt on the street column, you look at unemployment being so low, coupled with the onslaught of fiscal stimulus could overheat the economy, and that could force the Fed to raise interest rates more than they're actually projecting.
[05:06]
C
Right. And this is actually when people say, oh, well, you know, multipliers. These multipliers, right. They're low when the economy is sort of far along what they call late cycle they say, oh, well, the multiplier is low. And that would mean. That makes sense. Right, because the economy throws off more heat because unemployment is so low, so the Fed has to raise rates more. But now, if you look at what the Fed is saying, they're not saying that they're going to be raising rates all that much more than what they thought back in September. So they're not saying that. So something has got to give here. Either you're going to get stronger growth or you're going to get more rate increases, or maybe you're going to get a little bit of both.
[05:50]
B
Do you think this conservative approach to growth projections and how many interest rate increases there might be is designed to leave some room for accelerated growth so the Fed isn't caught overshooting things, which could then spook the markets?
[06:03]
C
I suppose so. I mean, I think the other thing is people are just so cautious when it comes to forecasts. These are the projections that the people voting on the Fed that various governors of the different Federal Reserve banks are giving. I think there's sort of an inherent caution given how disappointing the economy has been throughout this recovery. Right. So that may be holding them back. That might be ultimately what's going on. And there may also be. There's also a caution about what kind of inflation they might get again, because inflation has just been so low for so long, even though, well, they've been
[06:42]
B
overestimating inflation for a while. I guess that they're learning from the scars they have and that's why they pull back on their projections.
[06:50]
C
Yeah, that might be it. But it's still, at a certain point you have to say, gosh, the unemployment rate is at 4.1%. If we're going to have any kind of growth for much longer, it seems like it's going to go below four. That seems like a startling number. Seeing a three handle on the, on the unemployment rate, you'd think that that would cause some wage increases, justify higher rates, but that isn't quite happening right now.
[07:22]
B
The idea of not trying to make waves and going out on a limb, and if the intended purpose is not to upset the markets, and it may or may not be, it seems to be a part of the DNA of the Fed that we have seen going back to the Janet Yellen tenure when she was Fed chair, when it seemed as if, when messages coming out of the Fed were a little bit conservative.
[07:42]
C
Yeah, I think that that's right. And I think this also goes back to. I think that people have been so wrong in their forecasts about the economy that maybe there's a little more humility now. And I think one of the hallmarks of Janet Yellen's Fed was we're going to wait until we see it before we do something. So they weren't going to just sort of say, well, we're going to forecast it. We're going to believe in our forecast and therefore we're going to react to our forecast before we actually see what the economy is doing. I think that's there may be a continuation of that. So, yeah, it seems like we should have a lot stronger growth than what they have penciled in given all this stimulus. Yeah, it seems like there should be justification for more rate increases. Right. But maybe they're just going to wait and see. And if that growth materializes, if that justification for raising rates by more than what they have penciled in now materializes, then they're going to go ahead and do it.
[08:44]
B
All right, that's heard on the Street. Columnist Justin lehart joining us here in our studio. Justin, thanks for being with us.
[08:49]
C
Thank you.
[08:50]
B
And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.
[08:55]
A
Still running global payroll like a relay race. Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday, SAP, Netsuite operate like a local everywhere. Visit deel.com WSJ that's deel.com WSJ.