Federal Reserve officials sharply downgraded their forecasts for economic growth and jobs on Wednesday, expecting a sluggish recovery and high unemployment for years to come.
In releasing their projections for how the economy will perform in the years ahead, the 17 top officials of the central bank project that the jobless rate, 9.1 percent in September, will fall only to 8.5 to 8.7 percent by the final months of 2012. In June, the last time they released projections, they thought the unemployment rate would descend to around 8 percent.
They envision a very slow decline in unemployment beyond that, with the jobless rate falling to the 6.8 to 7.7 percent range by the end of 2014. That is still well above the 5.2 to 6 percent range that they view as the longer run jobless rate.
The Fed officials predict a lackluster 2.5 to 2.9 percent pace growth in gross domestic product next year. That is not much higher than what they view as the economy’s longer run potential growth rate, and is not enough to repair the economy quickly. In June, they thought 2012 GDP growth would be in the 3.3 to 3.7 percent range.
The forecast was released a couple of hours after the central bank announced that it would not take new action to pump money into the economy, assessing that economic growth had “strengthened somewhat” in recent months.
Some Fed officials had argued for the central bank to take further action to pump up growth, such as beginning new purchases of mortgage-related securities to try to lower interest rates and support the housing market. But after two meetings at which the central bank took steps to ease monetary policy, Fed officials elected to stand pat.
One official, Federal Reserve Bank of Chicago President Charles Evans, opposed the decision, arguing that the Fed should have taken more action to help the economy. While dissents in the opposite direction–arguing for less aggressive policy–have been common in recent years, it was the first time in four years that an official has dissented in favor of doing more.
Later in the day, Chairman Ben S. Bernanke began a news conference by recapping the forecast and then took questions from reporters. The first noted the criticism that Republican political leaders have lobbed at the Fed over its monetary policy decisions. “It’s very important” he responded, that the Fed — as an independent body — be free of political influence. In addressing the concerns that Republicans have raised about an increase in inflation, Bernanke noted that “inflation has averaged 2 percent,” the Fed’s target rate. “Where we are falling short,” he said, “is on the unemployment side.”
The leaders of the central bank likely also spent much of the two-day meeting discussing how they communicate their expectations and goals for the economy. There was no immediate announcement Wednesday of changes to those strategies.
The policy-setting Federal Open Market Committee saw the economic situation as being slightly better than they had at their September meeting, however, saying that “economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year.”
The U.S. economy grew at a 2.5 percent annual rate in the July through September quarter, the Commerce Department said last week.
But the Fed’s policy statement was hardly ebullient in its description of the economy. “Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,” the statement said, and “the housing sector remains depressed.”
Evans has argued for a variety of more aggressive steps to try to strengthen the economy and reduce unemployment, but had not previously dissented from a Fed action. The last time an official voted against policy in the “dovish” direction, favoring easier monetary policy, was Boston Fed President Eric Rosengren in December 2007.
At the last two Fed meetings, three policymakers dissented in the opposite direction, worried the Fed’s monetary policy was doing too much to boost growth and risked inflation. None did so at this meeting.
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