You know things are bad when even the optimists sound unsure about the future.
The Federal Open Market Committee came out with more negative predictions for inflation, economic growth and unemployment today, but still said that by the end of 2013 everything should be much better than it is now.
However, at his second-ever press conference this afternoon, Fed Chairman Ben Bernanke was murky about the basis for that hope, and said some fairly pessimistic things to boot.
In their latest guidance, the FOMC said inflation would come down below 2% by the end of 2013, unemployment would drop as low as 7% and growth would get close to 4% by the end of 2012. Those numbers are slightly less positive than after the last projections in April but still rosier than many on Wall Street expect.
Bernanke at his press conference defended those numbers. But he admitted that Fed economists were unsure about how much of the economic weakness was due to transitory factors, like the disaster in Japan and the spike in oil prices, as opposed to larger issues in the housing and financial sectors.
“We don’t have a precise read on why this slower pace of growth is persisting,” Bernanke said, while restating the Feds insistence that their best guess is that it won’t.
Bernanke also painted a fairly bleak picture of what could happen if Greece’s crisis continued unchecked and said that the Fed, in its role as regulator of systemically important banks had asked them to do stress tests to find out what the effects would be if Greece defaulted on its loans. “The answer is the effects would be very small,” he said, but it “could roil the markets so in that respect the effects in the U.S. would be quite significant.”
Bernanke also warned Congress and the administration not to cut the deficit aggressively in the short term, which he said could boost unemployment, but should instead focus on lowering the debt over the course of the next decade. He said short-term belt-tightening would be “negative in terms of job creation.”
And just to round out the sunny mood, he even jacked up the recent recession in historical terms, calling it certainly “the worst financial crisis since the great depression and possibly in the history of the U.S.” But it’ll all be much better by the end of 2013.