The Federal Reserve pushed its forecast for a return to a precrisis pace of economic growth into 2015, and left its inflation outlook largely unchanged, bolstering expectations that the central bank will leave its benchmark interest rate near zero well into next year.
U.S. equity prices rose to fresh records Wednesday as Fed chair Janet Yellen both assured investors that the revision to the outlook mostly was the result of a tough winter, and not a material loss of forward momentum. She also dismissed worries that inflation is heating up, calling recent price data “noisy” and stating her opinion that price increases are a long way from breeching the Fed’s 2-per-cent target. As expected, the Fed said it would reduce its monthly bond purchases by another $10-billion (U.S.), leaving it on track to end the extraordinary stimulus program by the fall.
“Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter,” Ms. Yellen said at a press conference after a two-day meeting of the Federal Open Market Committee, the Federal Reserve System’s policy-setting body.
When the committee last met at the end of April, officials still were trying to come to grips with a shocking deterioration in first-quarter economic indicators. They assumed most of the decline was the result of a tough winter, but there were fears there could be more to it. Six weeks later, those fears have abated, as the committee said in a statement that “economic activity has rebounded in recent months,” an assertive assessment by Fed standards.
Still, those difficult winter months resulted in lost sales and production that officials were counting on to increase economic output by at least 3 per cent this year for the first time since 2005. That is unlikely to happen now, as the Fed revised its growth outlook for this year to between 2.1 per cent and 2.3 per cent from 2.8 per cent to 3 per cent in March.
Wall Street economists expected a severe downgrade. Some were surprised by the Fed’s lack of concern about signs of hotter inflation. The central bank’s language on prices was unchanged from April, despite a report this week that showed the Consumer Price Index increased 2.1 per cent in May from a year earlier, the fastest in 19 months. The Fed’s forecast for inflation was little changed.
“The data we are seeing are noisy,” Ms. Yellen said. “Broadly speaking, inflation is evolving in line with the committee’s expecations.”
This week’s policy meeting included three new officials: Stanley Fischer, the new vice-chairman; Lael Brainard, another addition to the Washington-based Federal Reserve Board; and Loretta Mester, who replaced Sandra Pianalto as president of the Federal Reserve Bank of Cleveland. In all, 16 policy makers contributed to the updated economic outlook, which is based on the individual forecasts of each member.
The policy committee did surprise some market participants by appearing to tilt slightly in favour of higher interest rates in 2015 than expected earlier this year. The average estimate for the benchmark rate at the end of next year now is 1.13 per cent, compared with a March estimate of less than 1 per cent. The forecast for the end of 2016 is 2.58 per cent, a quarter of a percentage point higher than the previous outlook.
These shifts are marginal and Ms. Yellen said it would be a mistake to read too much into them. A benchmark rate of 2.5 per cent at the end of 2016 still would be exceptionally low by historical standards, showing policy makers expect the U.S. economy will struggle to find a faster gear.
“With no clear reason to change tack, the Fed is staying the course, and appears likely to do so at least until economic developments suggest a new plan is warranted,” New York-based economists at Royal Bank of Scotland advised clients in a note.