The Fed has decided not to pull back on an $85 billion monthly bond buying program but more importantly was the details of the Fed's thinking also emerged. In its economic and interest-rate projections they expect soft growth, low inflation, modest improvement in unemployment and a very long period before short-term interest rates rise again.
By Jon Hilsenrath
September 18, 2013, 2:24 PM
Wall Street Journal
The big headline in Wednesday’s Federal Reserve meeting is its decision not to pull back on an $85 billion monthly bond buying program. But important details of the Fed’s thinking also emerged in its economic and interest-rate projections: Soft growth, low inflation, modest improvement in unemployment and a very long period before short-term interest start rising again.
Here is a closer look at how the Fed sees the economy and rates:
–Ten of 17 Fed officials see short-term interest rates at or below 2% by the fourth quarter of 2016. Fourteen of 17 Fed officials don’t see the Fed starting to raise interest rates until 2015 or 2016. The message: The Fed is going to take its time before it starts raising interest rates, and once it does start raising them it intends to move slowly.
–Once again the Fed is revising down its economic growth forecasts. The Fed now sees growth between 2% and 2.3% this year, down from 2.3% to 2.6%. It also nudged down its 2014 growth forecast to between 2.9% and 3.1%, from 3.0% to 3.5%. Fed officials have consistently over-estimated the strength of the recovery and that’s one trend that has not changed.
–Even though growth keeps disappointing, the Fed sees unemployment on track to keep falling to between 6.4% and 6.8% in 2014, between 5.9% and 6.2% in 2015 and between 5.4% and 5.9% in 2016. There are two important points related to these projections: 1) Fed officials are getting increasingly used to the idea that the economy doesn’t need to generate as much output as they have expected to reduce unemployment. That’s in part because the labor force isn’t growing as fast as it used to grow. 2) Their 6.5% unemployment threshold looks like a very soft target. The Fed has said it won’t even start talking about raising short-term interest rates until the unemployment rate hits 6.5%. Their own projections show the jobless rate near 6.5% by late 2014, but rate hikes not starting until 2015. The means you can prepare yourself for a long conversation at the Fed – months long – about raising rates after the 6.5% unemployment threshold is touched.
–The Fed sees inflation firming. The forecast for this year is between 1.2% and 1.3%, more than the forecast in June of 0.8% to 1.2%. Still, they don’t see it getting back to 2% next year. In other words, they’re little less worried about inflation getting too low, but they do see it remaining below their 2% objective. That’s likely to be floated as another reason to be patient about pulling back on bond buying or raising short-term rates.
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