WASHINGTON – The Federal Reserve said Wednesday that its expectations for domestic economic growth during the current year have increased modestly since January, but it reduced its growth forecast for 2013 and 2014.
In a statement following a two-day meeting of its policy-making committee, the Fed said that it would continue its existing efforts to stimulate the economy, but it decided again not to expand those efforts, even though its projections show unemployment will remain a massive and persistent problem for years to come.
The statement also said that the Fed plans to maintain those existing efforts, including holding short-term interest rates near zero, “at least through late 2014.”
But a separate summary of the views of senior Fed officials showed that a majority of the committee now expects to raise interest rates by the end of 2014.
“The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually,” the statement said. It said unemployment would “decline gradually” and that inflation remained under control despite the impact of the recent rise in oil prices, which it regards as temporary.
The Fed’s chairman, Ben S. Bernanke, strongly defended the calibration of the central bank’s policies at a press conference following the release of the statements. He said that the Fed already was engaged in a massive effort to bolster the economy.
“The question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate,” he said. “The view of the committee is that that would be very reckless.”
He added that the Fed’s ability to reduce the unemployment rate more quickly was somewhat “doubtful” and that any success likely would be small.
On the other hand, he warned, embracing a higher inflation rate would risk a change in the perception that the Fed would maintain inflation at a low and steady rate – a perception that the Fed regards as its most valuable achievement.
The statement, released at 12:30 p.m., and the economic projections, released at 2 p.m., are not completely consistent, reflecting their different origins. The statement, which declared the Fed’s commitment to its current policies, is strongly shaped by Mr. Bernanke, who effectively controls the 10-member policy committee.
The projections, which reflected a somewhat more cautious view of the need for the full measure of promised efforts, are compiled from the projections of a broader group of 17 officials, including all 12 presidents of the Fed’s regional banks. Only five of those presidents hold votes on policy during any given year.
Mr. Bernanke suggested during his press conference that investors and other observers should pay more attention to the statement than the projections. He described the projections as the raw material from which the committee’s own view emerges.
The broader group of officials predicted that the economy would grow between 2.4 percent and 2.9 percent this year, an increase from their January forecast of growth between 2.2 percent and 2.7 percent. They predicted the economy would grow between 2.7 percent and 3.1 percent in 2013, and 3.1 percent to 3.6 percent in 2014.
The officials also predicted that the rate of unemployment would decline somewhat more quickly than they had earlier said, ending 2012 at between 7.8 percent and 8.0 percent. In January, they predicted a rate between 8.2 percent and 8.5 percent. By the end of 2014, they predicted that the unemployment rate would sit between 6.7 percent and 7.4 percent, only slightly different than the range of predictions in January.
The central bank has held short-term interest rates near zero since late 2008, and it has sought to further reduce long-term rates through the purchase of Treasury securities and mortgage bonds. Nine of the 10 members of the committee supported the public declaration that the Fed plans to continue these policies at least through late 2014. Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, dissented, arguing that rates will need to rise before then.
The Fed also made no policy changes at its last meeting, in March, and there are some indications that this relative stability could become a pattern.
The Fed’s plans are always contingent on economic conditions. And in normal times, relatively small changes in the health of the economy produce small changes in monetary policy. But the present moment is different because the only options available to the Fed are very big steps. Any new effort at stimulus must be massive to produce even a small economic boost. And any reduction in existing efforts, however small, would carry the outsized significance of a change in direction.
As a result, no change in policy is likely until conditions change significantly.
“If there’s a substantial change in the economic outlook in either direction, then there would be a change in the outlook,” Mr. Bernanke said. “But for now I think the committee is comfortable.”
While a dissident minority of Fed officials has pressed for the central bank to retreat from its stimulus campaign, their external profile exceeds their internal influence. Mr. Bernanke, like his predecessors, effectively controls the course of monetary policy, and he has made clear that he does not agree the Fed is doing too much.
At the same time, while Fed officials have been careful to preserve the possibility of an expanded aid campaign, the prospects have faded. The rate of inflation remains close to the Fed’s long-term target of 2 percent, which means that Fed officials perceive relatively little room for additional stimulus, and there are also doubts about the capacity of monetary policy to increase the pace of job creation.
Moreover, while the Fed routinely denies that the political calendar influences its deliberations, many outside analysts – including some former Fed officials – say that the central bank is less likely to change course as the fall elections approach, because it does not want to be perceived as playing a role in the outcome.
The committee is scheduled to hold its next meeting on June 19 and 20.
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