Fed upgrades economic forecasts, sees lower unemployment rate

The Federal Reserve has upgraded its economic outlook for this year and next, centred around a more robust labour market and slightly higher inflation.

The US central bank — which raised interest rates at its policy decision on Wednesday, as expected — released its updated economic projections for this year and out to 2020. It also dropped language in its accompanying policy statement pledging to keep rates at crisis-era levels for an extended period.

The Fed forecast real gross domestic product growth in 2018 of 2.8 per cent, up 0.1 percentage point from its March projection, but its estimates for 2.4 per cent growth in 2019 and 2 per cent in 2020 were left unchanged.

The central bank’s preferred measure of inflation, the core personal consumption expenditures index, was expected to reach 2.1 per cent this year, compared to a March projection of 1.9 per cent. Forecasts of 2.1 per cent next year and in 2020 were left unchanged.

The Fed also showed confidence in the state of the labour market, and said it expected the unemployment rate to fall to 3.6 per cent this year, down from 3.8 per cent in its March projection. The bank also sees the rate falling further, to 3.5 per cent in both 2019 and 2020, having previously forecast a reading of 3.6 per cent in both those years.

The Fed’s updated projections also saw it tighten the expected range for its key forecasts, lifting the lower end estimates for interest rates, GDP growth and inflation for this year and next but keeping the high end of the range steady. For the unemployment rate in 2018 and 2019, the Fed trimmed its upper end forecasts, but kept the lower bound steady.

James McCann, global economist at Aberdeen Standard Investments, pointed to the dropping of its crisis-era language and the signalling of extra rate rises this year and said: “This shift reflects the robust domestic growth backdrop, which is being fermented by a late cycle fiscal stimulus. It remains to be seen whether that’s going to be enough to keep a lid on inflation, with faster hikes likely required over 2019 too.”

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Fed upgrades economic forecasts, sees lower unemployment rate

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