Here we go again: Fed cuts U.S. growth forecast

For the third time this year the central bank cut its forecast for U.S. economic growth in 2013. The Fed now sees the economy growing in a range of 2.0% to 2.3%. Earlier forecasts had predicted growth of 2.3% to 2.6% and 2.3% to 2.8%.

Jeffry Bartash
September 18, 2013, 2:21 PM
Market Watch

The Federal Reserve’s economic team might be in need of a relief pitcher. For the third time this year the central bank cut its forecast for U.S. economic growth in 2013.

The Fed now sees the economy growing in a range of 2.0% to 2.3%. Earlier forecasts had predicted growth of 2.3% to 2.6% and 2.3% to 2.8%.

Being wrong is nothing new for the Fed. The bank has repeatedly offered forecasts over the past few years that turned out to be way too rosy.

Why the latest downgrade? The Fed believes federal spending, which has declined, and rising mortgage rates are hindering the economy. The irony is, mortgage rates shot up after the Fed signaled during the summer that it planned to end an asset-purchase program aimed at keeping interest rates low.

Instead, the Fed on Wednesday surprised Wall Street and decided to keep spending $85 billion a month on Treasurys and mortgage-backed securities.

One reason the Fed is not so worried about maintaining the high level of purchases: low inflation. The bank predicts inflation will remain under 2% until 2016, well below its 2.5% threshold, as measured by the PCE index.

In its latest economist forecast, the Fed predicts an inflation rate of no higher than 1.2% in 2013, rising to a range of 1.7% to 2% by 2016.

The economy, for its part, is projected to accelerate to a growth range of 2.9% to 3.1% in 2014 and 3% to 3.5% in 2015.

By 2016, the U.S. should be expanding between 2.5% to 3.3%, according to the Fed’s first forecast for that year.

Faster growth, in turn, should reduce the nation’s 7.3% unemployment rate to as low as 7.1% at the end of 2013, to 6.4% in 2014, to 5.9% in 2015 and to 5.4% in 2016.

In light of these predictions, the vast majority of Fed policymakers predict the bank will not raise the short-term fed funds interest rate until 2015. By 2016, the fed funds rate could move to a range of 1.75% to 2.25%, Fed officials guess.

All of these predictions, of course, are subject to change given the Fed’s lackluster record. Investors shouldn’t bet the house on these forecasts.

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