Central bank sees 3.75%-4.75% growth in 2004 while panel of economists expects only 3.7% rate.
July 16, 2003: 3:23 PM EDT
NEW YORK (Reuters) - Federal Reserve policy makers' forecasts for U.S. economic growth next year are way above the market consensus and the strongest since 1984, suggesting they are confident recent stimulus will light a fire under the moribund recovery.
But economists caution the central bank has been overly optimistic in its forecasts throughout the entire downturn and pallid recovery, and as yet there are scant signs of the long-anticipated return to solid growth.
The Fed's central tendency forecast for 2004, compiled from estimates by the members of the policy-setting Federal Open Market Committee, put growth at 3.75 to 4.75 percent.
The mid-point of that range, 4.25 percent, is well above the median 3.7 percent forecast of 29 private-sector economists polled by Reuters over the past week.
"It looks to me like a stretch, really," said 4Cast chief economist Alan Ruskin, who thought the Fed would predict growth about 1.0 percent lower.
He said the "most stunning" aspect was that the estimate was the strongest in the last 25 years, equaling the Fed's previous highest 4.25 percent forecast in 1984.
Even the White House, which has an interest in seeing the economy pick up smartly, predicted a more conservative 3.7 percent rate in its latest update Tuesday.
In the first quarter this year, the economy grew a measly 1.4 percent, and a similar pace is likely for the second quarter.
The figures have yet to show much sign of the foundations of the second-half recovery the Fed is also hoping to see.
But Fed Chairman Alan Greenspan said Wednesday the "general presumption" among economists is that if even a modest part of the latest round of tax cuts is spent, gross domestic product, the broadest measure of economic activity, will grow faster.
The key uncertainty, as it has been for two years, is when businesses will come to the party and start spending and hiring again. Capacity use figures Wednesday showed about 27 percent of factories' machines still are lying idle.
Greenspan, under questioning by the Senate Banking Committee Wednesday, conceded the Fed's forecasts over the past two years have been overly optimistic.
"It is certainly the case that we and others have been projecting a recovery sooner than it has obviously been occurring," Greenspan told Congress.
That was a charge the Fed itself leveled at the Bank of Japan in its failure to act early and aggressively enough to prevent deflation in Japan, since its estimates of future growth consistently turned out to be too high.
Yet a study by the St. Louis Fed found the Fed's forecasts over the past 25 years were as accurate as the private-sector survey by the Blue Chip Economic Indicators group.
Over time, the Fed's forecasts showed an error of a reasonably modest 1.25 percent.
For next year, "the forecast is as much an official target as an official forecast," said Rory Robertson, interest rate strategist at Macquarie Equities in New York.
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