Fed cuts 2012 growth forecast, raises next 2 years

September 13, 2012 - 2:34 PM

WASHINGTON (AP) — The Federal Reserve has lowered its growth forecast for this year but is more optimistic about the next two years. The brighter outlook likely reflects a series of bold stimulus measures that the Fed launched Thursday aimed at boosting the sluggish economy.

In its updated forecasts, the Fed said it now expects growth to be no stronger than 2 percent this year. That's down from June's forecast for as much as 2.4 percent growth. It's also not much better than the weak 1.7 percent annual growth rate the government reported for the April-June quarter.

The Fed said it expects growth to accelerate next year to as much as 3 percent, up from its June forecast of as much as 2.8 percent. For 2014, growth will range between 3 percent and 3.8 percent, the Fed predicts.

Growth at or below 2 percent is typically not enough to significantly lower the unemployment rate, which was 8.1 percent in August.

The Fed seems to agree. It says unemployment won't fall below 8 percent this year. But it expects it will drop as low as 7.6 percent next year and down to 6.7 percent in 2014.

It also expects inflation to remain at or below 2 percent for the next three years, in line with the Fed's inflation target.

The Fed raised its growth outlook for 2013 and 2014 after announcing that it will spend $40 billion a month to buy mortgage bonds for as long as it deems necessary to make home buying more affordable. It also plans to keep short-term interest rates at record lows through mid-2015 — six months longer than previously planned. And it's ready to take other unconventional steps if job growth doesn't pick up.

A chart in the updated forecasts offers some insight into the level of support at the Fed to push back its timetable for raising short-term interest rates. It shows 12 of the 19 members of the policy-setting committee expect to see the first increase in 2015. One member said the increase would not come until 2016.

In the June forecast, only six Fed officials expected the first rate hike to occur as late as 2015.