Yesterday's release of the January FOMC minutes show that Federal Reserve officials are more optimistic about the outlook for the economy. The minutes show that the Fed's GDP growth forecast for 2011 is now 3.4-3.9%, revised higher from the November 2010 forecast of just 3.0-3.6%. While this higher forecast is headed in the right direction given the plethora of strong economic data recently, it isn't high enough. We expect GDP to grow 4.5% in 2011 as the economy continues to recover from the financial panic and the Fed's extremely low interest rates spur economic activity. Data on consumption, manufacturing, industrial production, retail sales, and trade all back up our strong forecast, and make the case that the Fed is still too pessimistic about growth.
What's disappointing about the Fed's minutes is the lack of understanding of how serious the inflation threat is. With interest rates near zero and nominal GDP growing above 4% in the past year, inflation is set to rise. Our forecast looks for the CPI to rise 3.5% this year. This is much more inflation than the Fed expects. With yesterday's PPI report showing producer price inflation accelerating rapidly in the past few months (see our PPI Data Watch here), the Fed is already behind the eight ball when it comes to curbing future inflation. Now that the economy is humming along, it's time for the Fed to change its stance on monetary policy, and get serious about stemming the tide of coming inflation.
Click here to read the Fed's FOMC minutes.
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