Commission on Government Forecasting and Accountability
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Jil Tracy, Co-Chair
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Michael Frerichs, Co-Chair
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August 2014 Monthly Briefing
ECONOMY: LEFT TO THE FED
Edward H. Boss Jr., Chief Economist

The fate of the economy appears to rest in the hands of the Federal Reserve. It's objective is "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." An example of Fed action can be illustrated by the steps taken to put an end to rampant inflation that developed in the late 1970s throughout 1980. It directly limited money in circulation and let interest rates rise with the bank prime rate exceeding 20%. As a result the 1980 recession lasted only 6 months and it was only when the Fed refused to loosen policy even as the economy was mired in another recession that the back of inflation was broken.

The emphasis currently, however, is to stimulate economic growth, create jobs, and increase labor participation while keeping inflation contained. To do this, the Fed began instituting a program of "Quantitative Easing" by purchasing securities that lowered short-term interest rates and increased the money supply by flooding financial institutions with capital in an effort to increase lending and liquidity

Recent Fed actions seem to have helped. Even so, using monetary policy to direct the economy is awkward, works with a significant lag, and often has to be reversed causing market disruption and reigniting inflation. However, because the federal government has ballooned debt to a point that may preclude substantial fiscal stimulus, monetary policy has been looked at to meet today's objectives. How successful the policy is will be judged on how the recovery develops, inflation behaves, and jobs are created, first as quantitative easing purchases end and later as they become unwound.

REVENUE: AUGUST REVENUES FALL WITH WEAKER TRANSFERS AND FEDERAL SOURCES
Jim Muschinske, Revenue Manager

Overall base revenues declined $463 million in August. The large drop was not surprising as it reflected the lower anticipated transfer from the Income Tax Refund Fund as compared to last year. An extremely weak month for federal source reimbursements contributed to the large monthly decline. Most other revenue sources were either flat or suffered minor declines.
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Through the first two months of the fiscal year, overall base revenues are down $279 million. However, much of that decline was expected and is due to the much lower Refund Fund transfer into GRF. In addition, weaker federal sources to begin the year contributed to the fall off.
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