The Fed Keeps Overestimating Labor Market Health

A blog about business and economics.
Nov. 30 2011 2:12 PM

Chart Of The Day: Prescience Edition

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A great chart from Mike Konczal compares Federal Reserve projections of the future course of unemployment to the bleak reality. His point is that the Fed reacted to Lehman Brothers' bankruptcy being worse than they expected with new, more foreceful action. So why not react to the labor market being worse than expected with new more forceful action?

I might put this another way, in terms of the need to target the forecast. Since the projections keep being overly optimistic, the Fed keeps responded by making its next projection more pessimistic. But if you're sailing and the currents push you further west than you meant to be, you don't alter your forecast of where you'll land, you use the rudder to steer the boat to point it where you want to go. Throughout 2009, the projections at least keep maintaining that rapid recovery will come in the nearish future. That's exactly what the projections should say -- it would be weird for the Fed to "predict" that it would fail to deliver an adequate level of demand. But when things turned out to be worse than expected, the Fed started building predictions of its own failure into the model and arguing that a level of unemployment far above the "natural rate" would extend for a long time into the future. Why do this? Why not promise to act more forcefully?

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.