The Federal Reserve on Wednesday looked past recent soft economic indicators and raised its forecast for the U.S. economy, projecting stronger but still subpar growth this year.
At the close of a two-day monetary policy committee meeting, Fed Chairman Ben Bernanke explained that the central bankers now see growth in the range of 2.4 percent to 2.9 percent for 2012. They also expect the unemployment rate _ now at 8.2 percent_ to end the year somewhere between 7.8 percent and 8 percent.
The upgraded forecast came shortly after the Fed announced that it would leave its benchmark lending rate unchanged at near zero, where it’s been anchored since December 2008.
The central bank’s policymaking Federal Open Market Committee _17 Fed governors and district bank presidents _ said that it “currently anticipates that economic conditions_ including low rates of resource utilization and a subdued outlook for inflation over the medium run _ are likely to warrant exceptionally low levels (for interest rates) ... at least through late 2014.”
There was no surprise in the Fed’s statement.
Bernanke in a follow-up news conference cautioned against reading too much into soft employment readings in March, but he acknowledged that hiring could remain sluggish for the rest of the year. Employers added a weak 120,000 jobs in March, and first-time jobless claims rose during the first half of April.
“We don’t know yet and I wouldn’t draw too much ... from the March numbers,” the Fed chief said, noting that 100,000 jobs a month must be added for the unemployment rate to hold steady. The Fed expects hiring in the range of 150,000 to 200,000 per month.
In normal circumstances that would not be enough to knock down the jobless rate _ that traditionally requires about 300,000 hires per month. But Bernanke agreed that there is debate over how much of the falling jobless rate is because of a shrinking workforce that won’t return, vs. the normal business cycle of economic expansion. Young people who aren’t in the workforce now would likely come back once they think jobs may be available, he said, but the number of women in the workforce may have leveled out; the structural trend is for fewer women in the workforce.
Much of the news conference focused on the Fed’s revised forecast, which is brighter than the last one in January. The earlier one projected growth in the 2.2 percent to 2.7 percent range, with unemployment between 8.2 percent and 8.5 percent by year’s end. April’s central tendency forecast raised the possibility of a jobless rate below 8 percent.
“I think it’s optimistic, not drastically optimistic. It’s possible, but it’s probably a best-case scenario,” said Paul Edelstein, director of financial economics for forecaster Global Insight. “It really depends on how many jobs need to be created each month to bring that unemployment rate down.”
A separate measure that looks at the range of the 17 forecasts by Fed participants showed that the worst-case projections for unemployment in 2012 have improved sharply.
The Fed statement repeated that “exceptionally low (interest) rates” were expected through late 2014, but a separate chart showing when the 17 committee members think the benchmark lending rate will go up showed that seven members thought it would be at 2 percent or higher in late 2014. The Fed’s benchmark rate influences banks’ prime lending rates. Another seven members, however, thought the benchmark rate would still be where it is today _ near zero _ in late 2014. Two members thought it would be at 1 percent, while another thought 1.5 percent.
The divided views cast doubt on the Fed’s official expectation of “exceptionally” low rates lasting several more years. Members also project uncomfortably high unemployment, as high as 7.4 percent, in 2014. But inflation is projected to be running just over the 2 percent target at 2.2 percent at worst.
There’s nothing in those forecasts to warrant growth-slowing rate hikes. The divided views led some forecasters to expect lending rates to rise next year_ affecting everything from mortgages to car loans.
“We believe that the Fed will not be able to keep rates on hold until late 2014 and that it is more likely that rates will be hiked in 2013,” forecasters at RDQ Economics wrote in a research note to investors.