A gloomy economic forecast and its likely consequences

The Federal Reserve is forecasting that the unemployment rate, now 9.6 percent, will fall only to about 9 percent at the end of 2011 and about 8 percent at the time of the 2012 presidential election. I don’t take this forecast very seriously because I doubt the Fed has any clear idea what the unemployment rate will be in two years. Indeed, only a few months ago,the Fed’s forecasts regarding employment were more optimistic.
Moreover, the Fed has no incentive to present a more optimistic forecast now. If it did so, and its predictions were not fulfilled, the Fed’s quantative easing policy would come in for particularly intense criticism, in the same way the stimulus bill did when the administration’s employment forecasts weren’t met. (Whether this sort of thinking affects Fed forecasts, I do not know).
Would an 8 percent unemployment in 2012 doom President Obama’s re-election chances? I doubt it. If I recall correctly, Obama’s approval rating hovered around break-even with the unemployment rate near 10 percent; only after months of such bad news did Obama go “under water” in some polls.
It’s not difficult to see Obama at break-even with an 8 percent unemployment rate; nor is it difficult to imagine Obama being re-elected with break-even approval numbers. Keep in mind that Harry Reid was re-elected with unemployment in his state at around 14 percent and with an uneviable approval rating.
The Fed’s forecast is significant nonetheless because of how it likely will affect the landscape in 2011. In the face of gloomy economic forecasts, many congressional Democrats will probably proceed with greater caution than they otherwise would have done. If, for example, Democratic Senators in Red and Purple states must face the voters in a bad economy, presumably they would rather do so minus the perception that they are hard leftists.
President Obama has the same incentive to move away from a hard left agenda. For example, in the face of the Fed’s forecast, he should be less inclined to use executive orders and regulations in furtherance of such an agenda. And he should be less prone to burn up political capital bad-mouthing the U.S. overseas, reaching out to America’s adversaries, and brow-beating Israel.
However, I have far less confidence that Obama actually will moderate due to gloomy economic forecasts than I do when it comes to similarly vulnerable congressional Dems.

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