The Fed is worried about the economy, says FTN Financial economist Chris Low. At the March FOMC meeting they revised their forecast for economic growth lower. The economic recovery they saw in the second half of this year, the one they had revised up even as growth turned out weaker than they thought it would be in the fourth quarter, is now gone. They have replaced it with a period of sideways GDP followed by slow recovery in 2010. Inflation is below target for some time (i.e., deflation risk is high) and downside risks to growth predominate. It's depressing stuff.
So, should investors worry? Probably not. The FOMC has been remarkably slowly reaching the same conclusions investors reached months ago. There was an unsustainable debt bubble built on loans to people without the income to repay them. Leverage must be reduced, but it will take time. The biggest banks are in dire shape, but government life support will keep them going. And, the recovery will be slow in coming and gradual at best until these issues are resolved.
The economy and the financial markets underwent a cataclysmic transformation last year. Judging from speeches and testimony, Fed officials are only just beginning to understand what took place. As their understanding gels, they are slowly coming to terms with what the likely recovery will look like. It won't be pretty, but investors - for the most part - have understood that for some time.
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