Fed Cautious About Economic Growth

Catherine Hollander
National Journal

The Federal Reserve slightly downgraded on Wednesday its forecasts for growth in 2013. It now expects gross domestic product to rise between 2.3 percent and 2.8 percent, just a hair less than the 2.3 percent to 3.0 percent it expected in December. But it also released slightly better expectations for unemployment in 2013, to be between 7.3 percent to 7.5 percent, less than the 7.4 percent to 7.7 percent in December, perhaps reflecting the fact that the jobless rate fell to 7.7 percent in February.

Monetary policy affects the economy with a lag, and so where the economic forecast will be crucial to determining how and when it decides to change policy. The Federal Open Market Committee, which is the central bank's policy-setting committee, issues forecasts for change in real gross domestic product, unemployment and inflation, as measured by the so-called personal consumption expenditures, or PCE, price index. The central bank announced no shift in policy after the two-day meeting that concluded Wednesday. But its newly updated economic forecasts suggest there will be little reasonto take its foot off the gas earlier.

The unemployment rate has steadily come down since the depths of the crisis. The Fed has pledged to keep its benchmark interest rate near zero until the jobless rate drops to 6.5 percent, so long as inflation expectations for the next year or two remain at or below 2.5 percent. It has also said it will keep up its latest bond-buying program until the labor market improves "substantially." When it made that vow in September, the latest data showed unemployment at 8.1 percent. The jobless rate is one--but not the only--indicator that the Fed can use to assess the health of the labor market. Fed Vice Chair Janet Yellen recently said she would also consider payroll employment growth, the rate of hires and quits, and spending and growth in the overall economy.

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Gross domestic product took a dive at the end of 2012, but it is widely expected to pick up in the second half of 2013, despite some fiscal drag. 

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Here is a link to the Fed's projections.