A majority of Federal Reserve officials don’t expect to raise the main interest rate until 2015, when they forecast the jobless rate will fall to between 6 percent and 6.6 percent.
Federal Open Market Committee participants forecast today that gross domestic product will expand 2.3 percent to 3 percent next year, compared with 2.5 percent to 3 percent in September. Estimates for 2014 are from 3 percent to 3.5 percent, versus 3 percent to 3.8 percent in the previous projection, according to the central tendency forecasts, which exclude the three highest and three lowest of 19 projections.
The FOMC earlier today voted to supplement their $40 billion a month of mortgage-bond purchases with $45 billion in monthly Treasury purchases once their Operation Twist program expires at the end of the month. The Fed said interest rates will stay low “at least as long” as the unemployment rate remains above 6.5 percent and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent.
The jobless rate probably will average 7.4 percent to 7.7 percent in the final three months of next year, officials said, versus 7.6 percent to 7.9 percent in September.
Five of 19 officials said the first interest-rate increase since 2006 would be warranted in 2014 or sooner, while 13 said it would occur in 2015. One called for an increase in 2016.
Officials said prices as measured by the personal consumption expenditures price index may rise 1.3 percent to 2 percent next year, versus an increase of 1.6 percent to 2 percent in September. Central bankers have set a 2 percent target for inflation.
The central bank’s unprecedented easing is showing signs of strengthening growth in the world’s largest economy. The housing market, at the center of the longest and deepest economic contraction since the Great Depression, has begun to rebound. Still, the pace of growth isn’t fast enough to reduce the elevated jobless rate.
The economy expanded by 2.7 percent in the third quarter, exceeding the 2 percent pace previously reported, the Commerce Department said Nov. 29. GDP may expand 2.2 percent this year and 2 percent next year, according to the median of 79 economist estimates in a Bloomberg survey.
The Fed’s purchases of housing debt have helped drive down home borrowing costs to record lows. The average fixed rate on a 30-year mortgage was 3.34 percent last week, close to last month’s record low of 3.31 percent, according to Freddie Mac.
U.S. home prices jumped 6.3 percent in October from a year earlier, the biggest increase since June 2006, data provider CoreLogic Inc. said Dec. 4. The S&P/Case-Shiller index of home prices in 20 cities climbed 3 percent in September from a year earlier, the biggest gain since July 2010. New-home construction increased 3.6 percent to a four-year high of 894,000 in October, Commerce Department data show.
Record low borrowing costs and rising home values aren’t spurring a level of hiring that Fed officials want to see. New York Fed President William C. Dudley said in a Dec. 3 speech that “the unemployment rate remains unacceptably high.”
The unemployment rate declined last month to 7.7 percent, the lowest since December 2008, from 7.9 percent as the labor force shrank, according to a Labor Department’s report last week. Employment climbed by 146,000 following a revised 138,000 increase in October that was less than initially estimated.
“The labor market is moving in the right direction, though slower than anyone would like,” said Ward McCarthy, chief financial economist at Jefferies Group Inc. in New York and a former Richmond Fed economist. “It’s digging out of a deep hole but the break-even at least is coming in sight.”
Fed officials update their economic forecasts at least four times a year. Twelve members of the FOMC vote on the policy statement, while the interest-rate and economic projections reflect the views of all 19 participants. They began announcing their forecasts at their Jan. 24-25 meeting, a step in efforts by Chairman Ben S. Bernanke for more transparency.
Four FOMC spots rotate among Fed presidents each year. The Chicago, Boston, St. Louis and Kansas City reserve bank chiefs join the policy-setting panel at its next meeting Jan. 29-30.
The improving economy has helped boost asset prices, giving consumers more to spend on products and services. The Standard & Poor’s 500 Index has advanced 14 percent this year before today, while housing gains have sent the S&P Supercomposite Homebuilding Index soaring 73 percent. The 11-member gauge including Lennar Corp. and PulteGroup Inc. is on pace for its best year since jumping 97 percent in 2003.
Mortgage revenue at Bloomfield Hills, Michigan-based PulteGroup, the second-largest builder by market value, jumped 70 percent in the third quarter, almost six times the revenue gain from home sales. At Miami-based Lennar Corp., the No. 1 builder, mortgage-unit revenue surged 60 percent, double the sales revenue gain. Both posted the biggest profits since 2006.
The Fed’s large-scale asset purchases have boosted the central bank’s balance sheet to $2.86 trillion, close to a record. It has kept the benchmark lending rate in a record-low range between zero and 0.25 percent since December 2008.
“Low rates are not a panacea for this economy,” said Greg McBride, a senior financial analyst Bankrate.com in North Palm Beach, Florida. “If they were, it would have been sunshine and daffodils four years ago.”