South-Western College Publishing - Economics  
Housing Market Stalls Forecast
Topic Output, Income, and the Price Level
Key Words Housing, Consumer Spending, Energy Prices, and Inflation
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Reference ID: A166557292

News Story The Federal Reserve continues to forecast a period of “moderate growth” for the remainder of 2007. However, the continuing drag on the economy by the housing market has caused the Fed to downgrade their previous estimates of economic growth.

The central bank provides a “consensus forecast” of growth as a composite estimate from all twelve of the various districts. By taking the forecast from each district bank the Fed averages the numbers to come up with an overall estimate of economic growth. The most recent figures predict and expansion of around 2 ¼ to 2 ½ percent in 2007 and a slight increase to 2 ¾ in 2008.

Both of these recent forecast are one-quarter of a percent below what the Federal Reserve predicted back in February and lower than the 3 percent most economists consider the long-run potential growth rate for the U.S.

Ben S. Bernanke, chairman of the Federal Reserve gave the cause of the lower growth forecast as continuing problems in the housing market. He has blamed some of the weakness in the housing market on the number of sub-prime mortgages that bankers have made in recent years. He noted that the number of foreclosures has soared among people who took out sub-prime mortgages and he predicted the problems will “likely get worse before they get better.”

Mr. Bernanke acknowledged that rising food and energy prices teamed up to push the overall rate of inflation above the “core” rate which Fed analysts use to track inflation. Yet, he made it clear that the Fed policy makers will remain focused on “core inflation rate” which excludes energy and food prices because it provides a better long-term indicator of inflation.

Indicating that improved inflation numbers are far from a sure thing, Mr. Bernanke said the Fed expects the underlying pace of inflation –excluding the volatile prices of energy and food- to be right around 2 percent for 2007 and possibly as low as 1.75 percent in 2008. That prediction is in the Fed’s comfort zone for inflation and suggests little change in monetary policy for the near future.

Discussion Questions:
1. Discuss why the Fed use the “core” measure of inflation in its forecasts.
2. Give a brief discussion of what you think monetary policy will look like in the near future based on the information in the article.
Multiple Choice/True False Questions:
1. The “consensus forecast” of the Fed includes estimates from:
  1. the three largest Federal Reserve Districts.
  2. the six largest Federal Reserve Districts.
  3. the nine largest Federal Reserve Districts
  4. the twelve largest Federal Reserve Districts.
2. The “core” measure of inflation used by the Fed excludes:
  1. food and energy prices.
  2. food and transportation prices.
  3. energy and transportation prices.
  4. None of the above.
Source Edmund Andrews, “Fed Trims Its Forecast for Growth”, The New York Times Online, July 19, 2007.
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