Federal Reserve officials cut their estimates for 2012 growth after last month’s slowdown in hiring and see little progress on unemployment during the rest of the year.
Fed officials lowered their central tendency estimate for U.S. 2012 gross domestic product growth to 1.9 percent to 2.4 percent from 2.4 percent to 2.9 percent in April. Estimates for 2013 centered around 2.2 percent to 2.8 percent, compared with 2.7 percent to 3.1 percent in the previous forecast.
Consumers and businesses are restraining spending as European financial stress has knocked down U.S. stock prices. Yields on corporate borrowing rates have increased as investors flee from risk.
“Financial conditions are becoming somewhat more adverse for the economy,” said Kathleen Stephansen, senior investment strategist and global head of sovereign research at AIG Asset Management in New York. “The markets are still fragile.”
Seven Federal Open Market Committee participants said the first interest rate increase would occur in 2014, while six said it would occur in 2015. U.S. central bankers cut the benchmark lending rate to a range of zero to 0.25 percent in December 2008.
The Fed released the projections after a two-day meeting at which policy makers decided to expand their program to replace short-term bonds with longer-term debt by $267 billion through the end of 2012.
The continuation of the program, known as Operation Twist, “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said today in Washington.
The Standard & Poor’s 500 Index has fallen 4.3 percent from its 12-month high of 1,419.04 on April 2. Yield spreads on the Credit Suisse U.S. Liquid Corporate Index, which tracks almost 1,300 U.S. investment-grade corporate bonds with an average maturity of about 10 years, widened to as much as 1.865 percentage points over Treasuries of similar maturity this month, the highest since January.
FedEx Corp., operator of the world’s largest cargo airline, said this week that first-quarter profit would be lower than analysts estimated amid slowing U.S. economic growth. Average daily package volume in the U.S. fell 4.9 percent in FedEx’s fiscal fourth quarter, through May 31, a more rapid decline than in the three months through February, the company said yesterday.
The moderate rate of growth means demand is too weak to achieve full employment by 2014, according to Fed estimates.
Officials forecast the jobless rate will average 8 percent to 8.2 percent in the fourth quarter of this year versus an estimate of 7.8 to 8 percent in April. For next year, their unemployment forecasts centered around 7.5 percent to 8 percent versus prior estimates of 7.3 to 7.7. They expect the jobless rate to average 7 percent to 7.7 percent in the fourth quarter of 2014, according to the central tendency estimate, which excludes the three highest and three lowest forecasts.
Officials’ longer run estimate for unemployment, a proxy for their guess at the level at which the U.S. labor market is efficiently deployed, was unchanged at 5.2 to 6 percent.
The Fed released the expectations of the seven Fed board members and 12 district bank presidents after the Federal Open Market Committee today said “household spending appears to be rising at a somewhat slower pace than earlier in the year.”
Twelve officials vote on the policy statement, while the interest-rate and economic projections reflect the views of all 19 Fed officials. The so-called central tendency economic forecasts exclude the three highest and three lowest projections.
U.S. central bankers estimate that moderate rates of growth and labor market slack will help keep inflation at or below their goal of 2 percent per year. They forecast the price index for personal consumption expenditures would rise 1.2 percent to 1.7 percent in 2012, and 1.5 percent to 2 percent in 2013, according to central tendency estimates. They estimated prices would rise 1.5 percent to 2 percent in 2014.