A new study suggests that the Federal Open Market Committee, the central bank that oversees the U, could tighten monetary policies by just 5 percent, and the Federal Deposit Insurance Corporation, which covers banks, could cut rates by half.
Read moreThe study, released Wednesday by a panel of economists at the Federal Financial Institutions Examination Council (FFIEC), also indicates that the U could see a sharp slowdown in economic growth and employment if the economy continues to lag behind expectations.
The panel’s research found that while economic growth was expected to slow to 0.7 percent in the fourth quarter of 2020, that would shrink to 1.1 percent in 2021, 1.5 percent in 2022, and 2.2 percent in 2023, depending on how much the economy grows and if unemployment continues to rise.
The FFIEC said in a statement that its analysis is based on data that are being compiled from the Fed’s quarterly economic outlook and the Fed Board’s monthly report on the economy.
While the study notes that unemployment could rise further to 8.1 million in 2020 and 9.6 million in 2021 from the FFIec’s assumptions, it also noted that it could take the unemployment rate down to 7.6 percent in 2024 and lower it to 4.5 or 5 percent in 2025, depending how the economy develops and how the job market develops.
While it may sound like the Fed is trying to make a point, the FFSIC’s analysis does not directly address the possibility that the economy could slow further to a 0.5 percentage point drop in growth in 2020.
Rather, it focuses on the likelihood that the unemployment will remain above 8.5 million and then fall to 6.5 to 7 percent in 2020, depending when the unemployment rises and when it falls.
The Federal Reserve’s forecast assumes that economic growth will remain flat or near flat in 2020 while unemployment falls below 8.0 million, and that the rate at which people start receiving unemployment benefits will rise.
The FFSIEC estimates that, if that were to occur, the unemployment would fall to 7 to 8 percent in 2030.
Both the FFFIec and the FISC’s analysis also note that if the unemployment falls to 7, then there is a chance that inflation will continue to rise, with the price of energy and food rising as the economy becomes more reliant on consumer spending.
That could push up the price and wages of workers and lead to a further downturn in employment.
The Fed’s forecast is based mostly on the assumption that inflation would stay low and inflation-adjusted unemployment would be above 8 percent.
The Fed also assumes that the labor market would recover at the same pace that it did last year, so there is no evidence that the jobless rate will fall below 8 percent, the study found.
The panel of FFIEEC economists, which also include economists at JPMorgan Chase, Deutsche Bank, and BNP Paribas, is composed of experts who are appointed by the Federal Banking Committee, which is made up of the three central banks.
The research panel, however, also noted in its report that it is not certain that the FED will maintain its inflation target, which it said is set at 2 percent.
Instead, the Fed has the option to reduce its inflation goal to 1 percent, which would lower inflation, but not to the level that it would normally expect, the panel said.
The latest report from the Federal Finance Committee is expected to be released on Tuesday.
The Federal Reserve said it will be releasing its second round of forecasts this month, but the FFC has not yet said what those forecasts will be.