Fed Raises Economic Outlook, Leans Toward 2014 Hike

The Federal Reserve has boosted its outlook for U.S. economic growth this year and is slightly more optimistic about the unemployment rate, reflecting improvements in recent months.

Ben Bernanke
Ben Bernanke

In an updated forecast Wednesday, the Fed predicts the economy will grow between 2.4 percent and 2.9 percent in 2012. That compares with its forecast in January, when it estimated growth this year between 2.2 percent and 2.7 percent.

The Fed is estimating that unemployment, now at a three-year low of 8.2 percent, will be between 7.8 percent and 8 percent at year's end.

Its prediction for inflation is slightly higher but remains below its 2 percent target. And 11 Fed officials expect the first interest rate hike will not occur until 2014 or later, the same number who said so in January.

But the statement was a bit more hawkish in sentiment, with seven Open Market Committee members seeing a rate hike in 2014.

The forecast is critical in that it is indicative of whether the Fed will take on a third round of quantitative easing measures to boost the economy. An improving economy would suggest that QE3 is not imminent, though Chairman Ben Bernanke reiterated that the central bank is keeping its options open.

"We remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives," he said at a news conference. "Those tools remain very much on the table and we will not hesitate to use them should the economy require that additional support."

The central bank also projected long-run unemployment of between 5.2 percent o 6 percent.

The committee noted several pockets of weakness, particularly in housing.

"The ongoing weakness of the housing market represents a headwind for recovery," Bernanke said.

Bernanke also expressed concern over the "fiscal cliff," a name he has given to the damage that would result if Congress does not reach an agreement by the end of the year on deficit reduction. Should an impasse prevail, automatic cuts and tax hikes would take place.

He warned that the lack of agreement "would be a significant risk to the recovery."

Stocks briefly sold off following the release, while Treasury yields rose before also pulling back. The reaction likely came because investors doubted that the Fed would implement another easing program.

"The Fed has not changed its cautionary view of the economy and is keeping its potential support mechanisms ready should they become needed, Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, N.J., told Reuters "It is likely that the chairman will not voice any deeper concerns for the economy than have been expressed already in the FOMC statement and the Fed economic projections."

The forecast came on the same afternoon that the Fed, citing concerns about the pace of recovery, held its key interest ratenear zero and indicated the economy would have to improve substantially for any changes in policy to take place.

The Fed labeled economic growth as "moderate" and indicated that housing remains at a "depressed" level.

In all, the Open Market Committee statement offered little change in wording from the previous month.

A 9-1 vote accompanied the statement, which renewed the pledge to keep rates low through 2014. The discount rate remains unchanged at 0.75 percent.