Just How Far Has the Economy Fallen in a Month?

If the May Wall Street Journal economist survey is any indication, the economy is a lot worse off than it was as recently as a month ago.

In the last three surveys conducted by the Journal in which economists are asked when they think the Federal Reserve will next raise the federal funds target rate, the consensus answer has been June. In April’s survey, three-quarters of economists surveyed said they believe that a rate hike by the Fed will be announced at the next FOMC meeting on June 14 and 15.

May’s survey told a different story, however. Less than a third (31 percent) out of the 70 economists surveyed said they believe the rate hike will take place in June; 21 percent said they believe it will take place in July. The same percentage of economists who believe that a June rate hike will take place (31 percent) said they think it will take place in September.

What happened to the economy in the last month? A couple of setbacks—first, in late April, the Bureau of Economic Analysis announced GDP growth for the first quarter was a mere 0.5 percent (in their advance estimate). Then, last week, the Bureau of Labor Statistics reported that labor market gains fell short of expectations with just 160,000 jobs added during April.

Following the April FOMC meeting, the Committee announced that it would “closely monitor inflation indicators and global economic and financial developments,” to determine when would be the appropriate time to raise the federal funds target rate from its current range of 0.25 percent to 0.5 percent. The minutes from the FOMC meeting will be released on Wednesday, May 18.

Even before the economic turbulence experienced April, Fed Chair Janet Yellen suggested in late March that the Fed was in no hurry to raise rates further after the historic rate hike in December.

“Reflecting global economic and financial developments since December, however, the pace of rate increases is now expected to be somewhat slower.”

Fed Chair Janet Yellen

“A key factor underlying such modest revisions is a judgment that monetary policy remains accommodative and will be adjusted at an appropriately gradual pace to achieve and maintain our dual objectives of maximum employment and 2 percent inflation,” Yellen said. “Reflecting global economic and financial developments since December, however, the pace of rate increases is now expected to be somewhat slower.”

Yellen also noted at that time that “the housing market continues its gradual recovery, and fiscal policy at all levels of government is now modestly boosting economic activity after exerting a considerable drag in recent years.”

Also, in mid-April, Fannie Mae announced it had downwardly revised its forecast and was now expecting only one rate hike by the Fed for the rest of 2016 instead of two.

The Journal noted that it is rare for economists to be divided as to when the Fed would raise rates, with Capital Economics North American Chief Economist Paul Ashworth stating that a June rate hike by the Fed would require “stronger incoming data and no renewed market turmoil.” There will be one more employment situation released by the BLS before the next FOMC meeting.

Minneapolis Fed President Neel Kashkari said in a speech earlier this week that financial markets’ focus is in the wrong place if they are concentrating on what the Fed does with the short-term interest rates.

“Given all the attention market participants pay to every FOMC statement, one would think the Fed could control a lot,” Kashkari said. “But the truth is that central banks can’t influence many of the things that really matter to the long-term well-being of a society. We can’t influence trend productivity growth. We can’t influence competitiveness. We can’t influence educational performance.”