The Federal Reserve has downgraded its outlook for economic growth this year but is slightly more optimistic about the unemployment rate.
The Federal Reserve also says it plans to keep interest rates “exceptionally low” until at least late 2014, longer than previously forecast, while it expects unemployment will stay high and inflation will remain “subdued.”
The central bank said in a statement after a two-day policy meeting that the economy is expanding moderately, despite some slowing in global growth. It held off on any further bond-buying programs to try to increase growth.
The Fed expects the economy to grow between 2.2 percent and 2.7 percent this year. That's down from November's forecast of between 2.5 percent and 2.9 percent, the Associated Press reported.
Many economists expect Europe will suffer a recession this year, which will slow U.S. growth.
Still, the Fed said it expects unemployment to fall low as 8.2 percent. That's an improvement from November's bottom rate of 8.5 percent. In December, the unemployment rate fell to 8.5 percent — the lowest level in nearly three years — after the sixth straight month of solid hiring. Inflation has been relatively tame and the Fed doesn't see that changing over the next three years.
And for the first time, the Fed offered an official target for inflation — 2 percent — in a statement of its long-term policy goals. It had previously indicated that inflation between 1.7 percent and 2 percent was acceptable, the Associated Press reported.
The Fed didn't specify a target for unemployment. But it said that unemployment between 5.2 percent and 6 percent would be consistent with its goal for a healthy economy.
Meanwhile, the Fed also held its key benchmark lending target, the federal-funds rate, at 0.25 percent, citing a "depressed" housing market and high unemployment as reasons for brushing inflationary fears aside and opting for loose policies to keep consumer prices and unemployment rates at more dynamic levels.
The monetary authority said economic conditions meriting loose monetary policies should stick around through late 2014, longer than a previous forecast for 2013, as more than two years of economic growth haven't pushed the unemployment rate below 8.5 percent.
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The updated quarterly forecasts also showed that some Fed members wanted to extend the period of record-low interest rates beyond 2014. Eleven of the 17 members said they don't see interest rates rising until at least 2015. Only 10 members have a vote on the policy committee, the AP reported.
Some Fed officials have said further easing might be needed to revive the housing market and lower the jobless rate.
The central bank has kept its key rate at a record low near zero for about three years. Its new time frame suggests the rate will stay there for roughly an additional three years.
"While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated," the Fed said in a statement. "Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable," the statement said.
"In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
In 2011, the Fed said the economy wouldn't heat up enough to require interest-rate hikes or other tightening measures through 2013, although a weak economy has prompted Fed officials to extend that forecast for another year.
Private economists forecast that the nation's economy to grow just 2 percent in the first three months of the year, in part because of the recession in Europe. For the year, they expect growth of 2.4 percent, according to a survey by the Associated Press. That's sluggish for a recovery. But it is better than last year's likely pace of below 2 percent.
The Fed, meanwhile, said it would continue its policy of selling short-term Treasurys while stocking up on longer-term such instruments with the aim of keeping long-term borrowing costs low.
The Fed didn't say if it planned a third round of quantitative easing, where the central bank buys assets from banks in an effort to flood the economy with liquidity to steer the country away from deflation, but said it would keep an eye on the economy and react as necessary should the need arise.
"The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability."
The Fed has rolled out two rounds of quantitative easing so far, snapping up more than $2 trillion in assets like Treasurys or mortgage-backed securities with the aim of stimulating the economy.
Loose monetary policies, such as interest-rate cuts or measures aimed to boost liquidity, are used to steer an economy away from crippling deflation but threaten to increase inflationary pressures as a side effect.
"We have seen slightly better performance in the labor market, consumer sentiment has improved, industrial production has been relatively strong. There are some positive signs, no doubt," Bernanke told reporters at a press conference.
However, potholes remain, Bernanke added.
"At the same we have had mixed results in some other areas such as retail sales, and we continue to see headwinds emanating from Europe coming from the slowing global economy and some other factors as well."
While hoping for the best, the Fed will remain alert for the worst, and that means it won't rule out further easing at this time should inflation rates veer away from target or if unemployment rates rise beyond comfort zones.
"I don't think we are ready to declare that we have entered a newer and stronger phase at this point," Bernanke said.
"We are prepared to take further steps in that direction if we see that the recovery is faltering or if inflation is not moving towards target. It's an option that's certainly on the table. I think it would be premature to say definitively one way or the other but we continue to look at that option and if conditions warrant we will certainly consider using it."
The Federal Reserve adheres to a dual mandate of keeping both inflation and unemployment rates at optimal levels.
Analysts say the Federal Reserve's language suggested that while inflation remains within comfort zones, unemployment rates remain a little too high, while the slowdown in business investment won't t help the U.S. central bank live up to its mandates.
"I think what they are seeing is that the rate of growth is not sufficient to bring down the unemployment rate," says Brian Dolan, chief strategist at FOREX.com in Bedminster, New Jersey, according to Reuters.
Currently, unemployment rates stand at 8.5 percent although they spent a good chunk of 2011 hovering above 9 percent and are still well above pre-recession levels, approaching twice as high in some instances.
Inflation rates were unchanged in December when compared with November and up 3 percent on year.
"Rates are not going to go up anytime soon," says Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, according to Bloomberg.
"They don’t see a lot of inflation out there."
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