Fed upgrades economic outlook

February 17, 2011

Federal Reserve policymakers expect the U.S. economy to grow as much as 3.9 percent this year, slightly higher than earlier projections, according to minutes of the central bank’s latest policy meeting.

The officials think the recovery is on “firmer footing,” the minutes say, but they remain concerned that the pace of growth isn’t enough to put a serious dent in the country’s 9 percent jobless rate. They expect high unemployment to persist at least through the end of 2013.

On Wall Street, markets gained on the more positive forecast, with the Dow Jones industrial average adding 61.53 points, or 0.5 percent, and the S&P 500-stock index rising 0.6 percent. Strong corporate earnings from companies such as Dell and Comcast also helped propel the positive day for the stock market, which has risen steadily for months.

The minutes of the Jan. 25 meeting, released Wednesday, also show that Federal Reserve members unanimously support continuing an ambitious program, launched in November, to boost the economy by buying $600 billion of Treasury bonds.

The minutes noted discussion among committee members over whether to alter the bond-purchase program, given that the economy has been picking up some speed.

According to the minutes, a “few members” said that a strong enough recovery could cause the Fed to pare it back. Others, however, said the outlook was unlikely to change enough in the next few months to justify altering the program before its scheduled finish in June.

Paul Ashworth, chief U.S. economist at Capital Economics, said it’s unclear how much credit the Fed’s bond purchases deserve for the healthier economy. The program was intended to lower long-term interest rates, but rates have actually risen since the Fed began its initiative.

“In general terms, economic growth has been stronger since [the program] was announced,” Ashworth said. “Stock markets have enjoyed a good rally, but whether that is just correlation or causation is another matter.”

The Treasury purchases have been criticized by some Republican lawmakers, who say it could stoke inflation.

Although Fed policymakers noted at the meeting that commodity prices have begun rising, consumer prices — their chief concern — remain stable.

The Fed committee raised its forecast of 2011 growth in gross domestic product from a range of 3 to 3.6 percent to 3.4 to 3.9 percent.

They forecast that unemployment will be 8.8 to 9 percent at the end of 2011 and that the rate will continue to drop over the next two years. Officials predict the jobless rate will drop to between 6.8 and 7.2 percent by the end of 2013, still higher than before the recent downturn.

Meanwhile, new indicators released Wednesday showed that U.S. housing starts surged 14.6 percent in January compared with the month before, and wholesale prices rose more than twice what economists expected.

The U.S. producer price index excluding energy and food increased 0.5 percent, the largest jump since October 2008. New data on consumer prices is to be released Thursday.

yangjl@washpost.com

Jia Lynn Yang is a staff writer at The Washington Post who covers policy and business. Before joining the Post, she worked at Fortune magazine.
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