Fed slashes US growth forecast for 2014

Thursday 19 June 2014 07.22
The Fed said interest rates would remain near zero "for a considerable time" after the bond buying ends
The Fed said interest rates would remain near zero "for a considerable time" after the bond buying ends

The Federal Reserve has slashed its forecast for US economic growth this year but expressed confidence the recovery was largely on track and would allow it to begin raising interest rates in 2015.

Despite the cut from around 2.9% to a range of 2.1-2.3% for 2014, the Fed moved ahead plans to wind down its main stimulus programme by the end of the year, as expected.

It reduced its monthly asset purchases from $45 billion to $35 billion a month, divided between $20 billin of Treasury securities and $15 billion of mortgage-backed debt.

"Economic activity will expand at a moderate pace and labour market conditions will continue to improve gradually," the Fed said in its policy statement. 

"Household spending appears to be rising moderately and business fixed investment resumed its advance."

Updated economic forecasts from Fed officials showed an economy slammed by bad weather at the start of the year but poised to continue growing. 

Fed officials maintained their growth projections for 2015 and 2016, and foresaw a faster drop in unemployment and tame inflation.

In updated interest rate projections, Fed officials still foresaw rates beginning to rise next year. Of 16 individual rate hike projections, the median interest rate stood at 1% by the end of 2015, the same as in March.

However, Fed officials projected a slightly more aggressive path of interest rate hikes for the following year, with the median placed at 2.5% versus 2.25% in March.

Fed members also lowered their projections for long-term interest rates, a potential sign of reduced confidence in the economy's long-run potential. 

The median projection was for a long-term federal funds rate of around 3.75%, compared to around 4% in March.

The Fed's policy statement changed little from the one issued after its last meeting in April, repeating that interest rates would remain near zero "for a considerable time" after the bond buying ends. The Fed said unemployment remained "elevated" despite recent job growth, and noted that its preferred measure of inflation was still running below its 2% target.

There were no further details provided in the statement about the Fed's plans to exit other aspects of the extraordinary measures it has taken in response to the crisis.

For now, the Fed said it would continue reinvesting proceeds of its asset holdings as they mature.

The Fed cut overnight rates to near zero in December 2008 as it battled the financial crisis and deep recession. The timing and pace of renewed rate increases is one of the key decisions facing the central bank as the current recovery evolves.

In its updated quarterly forecasts, the Fed took into account the sour start the economy got this year after severe winter weather crippled activity in major cities around the country.

The US government said last month that GDP shrank at a 1% annual rate, and economists say data since then imply a much deeper contraction.

Although growth now appears to be rebounding, there remain weak spots, particularly in the housing sector. Fed officials described risks to the economy and labour market as "nearly balanced."