The unemployment rate, 7.6 percent in January, is expected to grow to 8.5 to 8.8 percent by the fourth quarter, and then fall back in 2010 and 2010.
If those forecasts turn out to be accurate, President Obama and Treasury Secretary Timothy F. Geithner will have every right to take a victory lap.
But the Fed has been consistently overoptimistic. As the economy deteriorated in 2008, they did not see how bad it was until the data made it clear. In the summer, the Fed officials saw the brief upward blip in economic activity caused by the tax rebates and thought it would continue. They raised their forecasts for 2008 growth.
In the most recent forecast, made at the end of October, the low end of the central tendency forecast for 2008—with only two months left—called for zero growth, well above the actual figure. That forecast was made six weeks after the credit markets seized up in the wake of the failure of Lehman Brothers.
As for unemployment, in October the central tendency for the fourth quarter average was for a rate of 6.3 to 6.5 percent. The most pessimistic of the other members thought the rate could get up to 6.6 percent. It turned out the rate for October—the month that was ending as the forecast was made—was 6.6 percent. For the quarter, the average was 6.9 percent, and by December it was up to 7.2 percent.
There is clearly a recognition now that there is a crisis, but the Fed members still find it hard to believe that things will get much worse.