Fed Officials Raise Forecast Target Rates for Next 2 Years

Federal Reserve officials predicted their target interest rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later, higher than previously forecast. They lowered their long-run estimated rate, reflecting a slower growth rate for the U.S. economy.

Most Federal Open Market Committee participants reiterated their view that the Fed will refrain from raising its benchmark rate until 2015. The median of today’s 16 forecasts compares with policy makers’ outlook in March, when they estimated the rate would rise to 1 percent by the end of next year and 2.25 percent at the end of 2016.

Chair Janet Yellen has said the FOMC will look at a wide range of data in determining when to raise its benchmark interest rate from zero. At a press conference in March, she warned against paying too much attention to the forecasts, which are shown as dots on a chart. “One should not look to the dot-plot, so to speak, as the primary way in which the committee wants to or is speaking about policies to the public at large,” Yellen said.

A majority of FOMC participants -- 12 out of 16 -- expect the first increase in the main interest rate in 2015. One projected the first rate increase in 2014, while three forecast an initial move in 2016.

Long-Term Rate

The long-term neutral federal funds rate, a level that neither kindles inflation nor curbs job growth, is seen at 3.75 percent by the median of forecasters, down from 4 percent in March. Fed participants estimated long-term growth for the U.S. economy of 2.1 percent to 2.3 percent, compared with 2.2 percent to 2.3 percent in March and 2.5 percent to 2.8 percent in January 2010 in the wake of the most recent recession.

In its policy statement, the FOMC said growth is bouncing back and the job market is improving. The committee trimmed bond-buying by $10 billion for a fifth straight meeting, to $35 billion, keeping on pace to end the program late this year.

“Growth in economic activity has rebounded in recent months,” the FOMC said. “Labor market indicators generally showed further improvement.” Business spending “resumed its advance.”

Still, policy makers cut their median forecast for economic growth this year to 2.1 percent to 2.3 percent from 2.8 percent to 3.0 percent in March, following a first-quarter contraction that Fed officials have attributed largely to transitory factors including severe winter weather.

‘Measured Steps’

The policy-making FOMC repeated today that it’s likely to “reduce the pace of asset purchases in further measured steps” and that it expects rates to stay low for a “considerable time” after the bond-buying ends.

Central bankers adjusted their unemployment forecast after a greater-than-expected drop in the jobless rate over the past three months.

Most FOMC participants predicted the unemployment rate will be 6 percent to 6.1 percent in the fourth quarter of 2014, and fall to 5.4 percent to 5.7 percent at the end of 2015 and 5.1 percent to 5.5 percent a year later. In March, they predicted the jobless rate would be 6.1 percent to 6.3 percent late this year, 5.6 percent to 5.9 percent at the end of 2015 and 5.2 percent to 5.6 percent a year later.

The estimates are based on the so-called central tendency, which excludes the three highest and three lowest projections.

Payrolls have increased four consecutive months by more than 200,000, the first time that’s happened since early 2000, and the jobless rate held at an almost six-year low of 6.3 percent in May, down from 6.7 percent in March.

Jobs Numbers

While Fed officials have used the unemployment rate as a core labor-market measure, Yellen has said it doesn’t provide a complete picture. The rate has fallen as labor force participation, the portion of the working-age population either employed or looking for a job, held at 62.8 percent in May, matching the lowest level since 1978.

“A decline in the unemployment rate could, for example, primarily reflect the exit from the labor force of discouraged job seekers,” Yellen said in a March 2013 speech in Washington. “That is an important reason why the committee will consider a broad range of labor-market indicators.”

Some FOMC participants, who aren’t identified by name when making their forecasts, are attending their first policy meeting. Last week’s Senate confirmations of former U.S. Treasury official Lael Brainard for the Fed Board and Stanley Fischer, former governor of the Bank of Israel, as the board’s vice chairman, added two fresh faces to the table, though Brainard didn’t submit forecasts, according to a Fed official who spoke on the condition of anonymity because the information hadn’t been publicly announced. Loretta Mester also made her debut as Cleveland Fed chief, succeeding Sandra Pianalto.

Jeremy Stein’s departure last month from the board leaves an open seat, while Jerome Powell made his first meeting appearance since being confirmed for another term on the board. All together, the changes leave two vacancies on the FOMC, the fewest empty seats since the expiration of Ben S. Bernanke’s second term as chairman in January.

Before it's here, it's on the Bloomberg Terminal.