US Fed expects slower growth, lower inflation next year and 2017 as it postpones rate hike

WASHINGTON – Federal Reserve policymakers have slightly lowered their projections for growth and inflation in the next two years, an outlook that likely factored into their decision to hold off on raising interest rates.

The Fed on Thursday also reduced its estimate for long-run unemployment to 4.9 per cent from 5 per cent. This suggests that it is willing to wait for unemployment to fall further before cutting rates. Unemployment stands at 5.1 per cent.

And Fed policymakers now see just one rate hike likely to take place this year, down from two in their previous forecast in June.

The Fed now expects that its preferred measure of inflation to rise only 0.4 per cent this year, down from 0.7 per cent in June. Both are far from the Fed’s inflation target of 2 per cent.

The Fed’s downgrades to its forecasts for growth and inflation weren’t large. It now foresees the economy expanding at just a 2.3 per cent pace next year, down from June’s projection of 2.5 per cent. It predicts that inflation will reach 1.7 per cent in 2016, just below its previous estimate of 1.8 per cent.

When the Fed does start to raise rates, policymakers see very slow increases: Just one-quarter of a percentage point this year, followed by 1 percentage point in 2016 and 1.25 percentage points to 2.63 per cent in 2017.

That is roughly half the pace of rate increases that occurred when the Fed last started raising rates in 2004.