Fed Sees Unemployment as Low as 6.5% Threshold by End-2014

Federal Reserve officials forecast the U.S. unemployment rate will fall to 6.5 percent to 6.8 percent by the end of 2014, possibly reaching its stated threshold to raise the benchmark lending rate.

At the same time, 15 of 19 participants on the Federal Open Market Committee expect the first rise in the federal funds rate to occur in 2015 or later, forecasts released today in Washington showed. That exceeds the 14 of 19 who projected in March the first rate increase would happen after 2014.

After today’s policy meeting, the FOMC said in its statement that the “committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.”

U.S. central bankers in December linked changes in the benchmark borrowing cost to the outlook for employment and prices. The FOMC said the rate will remain in a range of zero to 0.25 percent so long as unemployment remains above 6.5 percent and the outlook for inflation is no higher than 2.5 percent. The nation’s jobless rate in May was 7.6 percent.

The central tendency forecasts released today exclude the three highest and three lowest projections.

Labor Market

Officials’ estimates for the jobless rate centered at 7.2 percent to 7.3 percent for this year, 6.5 percent to 6.8 percent for 2014, and 5.8 percent to 6.2 percent for the average of the final three months in 2015, the forecasts show.

In March, the central-tendency projection for unemployment was 7.3 percent to 7.5 percent at the end of this year, 6.7 percent to 7 percent at the end of 2014 and 6 percent to 6.5 percent at the end of 2015.

The U.S. economy has shown resilience in the face of government spending cuts as consumers boosted spending and propelled gross domestic product to a 2.4 percent annual pace in the first quarter.

Fed officials now forecast that the economy would grow 2.3 percent to 2.6 percent this year and 3 percent to 3.5 percent in 2014. For 2015, their estimates centered around 2.9 percent to 3.6 percent.

In March they estimated 2013 growth at 2.3 percent to 2.8 percent and growth in 2014 of 2.9 percent to 3.4 percent. For 2015, they estimated an expansion of 2.9 percent to 3.7 percent.

Tame Inflation

A rapid slowdown in inflation has surprised some Fed officials this year. The personal consumption expenditures price index rose 0.7 percent for the year through April, the lowest since October 2009 and more than a percentage point below the FOMC’s 2 percent target.

Excluding food and fuel, consumer prices climbed 1.1 percent in the 12 months through April, matching the smallest increase since records began in 1960, according to a so-called core measure watched by the Fed.

U.S. central bankers estimated the PCE index will rise 0.8 percent to 1.2 percent this year, and 1.4 percent to 2 percent in 2014, according to central tendency estimates. For 2015, they estimate a 1.6 percent to 2 percent increase their June estimates show.

In March, officials forecast prices would rise 1.3 percent to 1.7 percent this year and 1.5 percent to 2 percent next year. The March outlook for 2015 prices showed a gain of 1.7 percent to 2 percent.

Fed officials’ estimates on the path of the federal funds rate showed that four expected it to be 1 percent or higher by year-end 2014, the same number as in the March projections.

By 2015, 13 officials expected the policy rate to be 1 percent or higher at year end, up from 10 in the March forecast.

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