Fed officials downgrade forecasts, signal easing of stimulus

Federal Reserve officials expect the U.S. to end the year with higher unemployment and inflation along with slower economic growth than they anticipated this summer, according to projections released Wednesday.

Members of the Federal Open Market Committee (FOMC) said that despite the forecasts, the pace of economic improvement is likely to warrant a decline in Fed stimulus within months.

"The progress of the economy continues to depend on the course of the virus, and risks to the economic outlook remain," Federal Reserve Chairman Jerome Powell said during a Wednesday press conference, adding that the COVID-19 surge is causing "significant hardship and loss and slowing the economic recovery."

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But the FOMC added in its September statement that "if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted."

As widely expected, the Fed also announced that it would not raise interest rates this month, likely keeping them at a baseline range of 0 to 0.25 percent through the balance of the year.

The economic projections are the median estimates from those in charge of setting the bank’s monetary policy. They are not considered a formal Fed forecast but provide insight into the individual expectations of FOMC members.

The median unemployment rate expected by Fed officials in December rose to 4.8 percent, up 0.3 percentage points from the June median estimate. The panel's median estimate of gross domestic product growth for 2021 fell from 7 percent in June to 5.9 percent, and its median estimate of annual inflation —measured by annual growth in the personal consumption expenditures index — rose to 4.2 percent from 3.4 percent in June.

The gloomier forecast comes after surging cases of COVID-19 driven by the delta variant severely slowed job growth in August, along with consumer spending in hard-hit areas of the economy. Employment growth fell from a haul of more than 1 million in July to just 235,000 in August, and experts fear September could bring a similarly disappointing haul.

But Powell expressed confidence Wednesday that the labor market would recover enough to warrant the Fed pulling back some of its bond purchases as soon as the FOMC's next meeting in November.

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The Fed has purchased at least $80 billion in Treasury bonds and $40 billion in mortgage-backed securities each month since March 2020 and has committed to doing so until the economy has made "substantial further progress" toward its goal of 2 percent annual inflation and a path to maximum employment.

Powell said Wednesday that inflation has long since met that "substantial further progress" marker after lingering at decade-plus highs for month but that FOMC members differ over whether the labor market has reached that point.

"Many on the committee feel that the substantial further progress test for employment has been met. Others feel that it's close — they want to see a little more progress," Powell said. "There's a range of perspectives.

But Powell reaffirmed that the Fed's decision on when to taper will not affect when it begins to hike interest rates even as Fed officials see that process beginning sooner.

Nine of the 18 FOMC members expected at least one hike in 2022, four more than in June. Three expected at least two hikes next year, and all but four FOMC officials expected at least two hikes by the end of 2023.

Updated at 2:52 p.m.