Fed Lowers 2003 GDP Forecast

By John S. McClenahen Virtually unnoticed as Chairman Alan Greenspan testified on Capitol Hill this week about U.S. monetary policy was that the members of the Federal Reserve Board and the presidents of the Federal Reserve banks have quietly trimmed their forecasts for inflation-adjusted U.S. GDP growth in 2003. Measuring the anticipated change between the final calendar quarter of 2002 and 2003's fourth quarter, they generally foresee GDP increasing 3.25% to 3.5%. Six months ago they were projecting 3.5% to 4% real growth. The Fed's latest GDP forecast is still decidedly more bullish than, for example, Merrill Lynch & Co.'s current outlook. The New York-based securities firm is projecting just 2.7% growth in GDP, measured fourth quarter 2003 against final quarter 2002. Presumably, the Fed's accompanying 2003 inflation forecast could be revised upward if crude oil prices rise to $40 per barrel and remain there for several weeks. But for now, the board and the bank presidents foresee just 1.25% to 1.5% inflation, measured fourth quarter to fourth quarter by a weighted personal consumption expenditure price index, a Greenspan-favored means of calculating inflation. By the end of the year, the Fed expects the U.S. civilian unemployment rate to be in the 5.75% to 6% range, above the 5.7% jobless rate that the U.S. Labor Department reported for January and the 5.25% to 5.5% spread the Fed projected six months ago.

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