Fed keeps faith in recovery, bumps up expected rate-hike path

Friday, 20 June 2014 00:00 - - {{hitsCtrl.values.hits}}

2014 GDP forecast cut, but 2015, 2016 held steady
Fed reduces monthly bond buying by further $ 10 billion

REUTERS: The Federal Reserve on Wednesday expressed confidence the US economic recovery was on track and hinted at a slightly more aggressive pace of interest rate increases starting next year. At the same time, however, officials at the central bank lowered their projections for the long-run target interest rate, evidence of slightly diminished expectations for a nation climbing out of a severe crisis and struggling with demographic headwinds like declining labour force participation.

As widely expected, the Fed pushed ahead with plans to wind down one of its main stimulus programs, reducing its monthly asset purchases from $ 45 billion to $ 35 billion beginning in July. At an afternoon news conference, Fed Chair Janet Yellen provided a long list of reasons for short-run confidence – from resilient household spending to an improving jobs market. Though officials slashed their growth forecast for 2014 from 2.9% to a range of between 2.1% and 2.3%, Yellen said that was the result of “transitory” factors like a severe winter and that a rebound was underway. “Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace,” she said. “The economy is continuing to make progress towards our objectives” of full employment and 2% inflation. But Yellen said there had been “a slight decline of projections pertaining to longer term growth” that prompted Fed officials to lower their view of the expected long-term federal funds rate from 4% to 3.75%. That is below the 4.25% historical level identified by New York Federal Reserve President William Dudley. The Fed’s two-day meeting ended with the central bank still comfortable in a situation where inflation is slowly edging up, unemployment is falling and growth is expected at around 3% for the next two years – above the long-term trend. That prompted the central bank’s policy-making ranks, joined by new members including Vice Chairman Stanley Fischer, to indicate rates will rise a bit higher over the next two years compared to their last round of quarterly projections in March. The Fed cut overnight rates to near zero in December 2008 as it battled the financial crisis and deep recession, and the timing and pace of future rate increases is one of the key decisions facing the central bank as the recovery evolves. Of 16 individual rate hike projections submitted for this meeting, 13 officials said rates should begin rising next year. The median projection for rates at the end of 2015 was 1.125%, up slightly from March. Officials projected a slightly more aggressive path of rate hikes for 2016, with the end-year median placed at 2.5% versus 2.25% in March. The higher median projections were far from a sign of emerging consensus, however, with forecasts more dispersed than they had been three months ago. 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 target.