Fed Forecasts at Odds With Trump Administration's Growth Target

By Harriet Torry Features Dow Jones Newswires

The Trump administration's plan to get the economy growing at a 3% annual rate has a skeptic: the Federal Reserve.

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Fed officials updated their long-run growth forecasts Wednesday, and the numbers show officials aren't convinced the economy is near revving up. Output has expanded at an annual rate of less than 2% for the past decade, and the Fed sees that continuing.

The Fed's latest forecasts show the central bank views the likely longer-run pace of growth at 1.8%, unchanged from their view in March when officials last submitted forecasts. While the rate of gross domestic product bounces around from quarter to quarter, it hasn't seen sustained annual growth above 3% in more than a decade.

President Donald Trump wants to boost sustained economic growth above 3% through a combination of tax cuts and other policy changes that his economic advisers believe can boost investment, productivity growth and labor-force participation.

"Fundamentally, we believe that we can get back to 3% sustained economic growth," Treasury Secretary Steven Mnuchin told the Senate Budget Committee this week.

"That's not this year, and that's not next year, but we can get there. And that's going to be a combination -- through tax reform, regulatory relief and trade," he said.

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Many economists doubt the viability of the target given sluggish growth in the size of the labor force and slow gains in worker productivity -- the basic building blocks of economic growth.

According to the Fed's median forecast, which barely budged at the Fed's June policy gathering, the economy should expand at about 2% a year through 2019 and settle at a 1.8% pace in the longer run.

Economists are largely on board with the Fed; most forecasters in The Wall Street Journal's most recent monthly survey expect the economy to grow slightly above 2% for the next couple of years. The nonpartisan Congressional Budget Office in January predicted long-run growth would average about 2%, too.

The disconnect between the central bank and the government could be explained by their views on the potential supply-side effects of proposed fiscal, regulatory and trade policy overhauls. Analysts point out that Fed officials have said in recent months they only will update their economic projections once they see concrete action on fiscal policy overhauls. Infrastructure spending; deregulation; and tax, immigration and trade policies are all up for reconsideration, but the size, composition, timing and financing of the moves remain vague.

"The reality is if we get a well-designed tax package and relief on the regulation side, the result is going to be somewhere in the middle [of 2% and 3% growth]," said Stephen Stanley, chief economist at Amherst Pierpont Securities.

Much now depends on the political agenda, and whether recent investigations into Trump associates and Russia will stall the White House's plans to rework fiscal policy.

At her press conference in Washington on Wednesday, Federal Reserve Chairwoman Janet Yellen noted that "many forecasters have pushed back somewhat the timing of the expected policy changes, such as changes to tax policy or fiscal policy more generally," in response to a question on whether her view of the outlook has changed in recent months.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

June 14, 2017 19:13 ET (23:13 GMT)