Fed paints brighter US picture

CHRISTOPHER S. RUGABER
Last updated 09:43 20/06/2013

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The Federal Reserve sketched a slightly brighter picture of the US economy this year and next, a sign it is moving closer to slowing its bond-buying programme.

The Fed now predicts unemployment will fall to 7.2 per cent or 7.3 per cent at the end of 2013 from 7.6 per cent now. It thinks the rate will be between 6.5 per cent and 6.8 per cent by the end of 2014, better than its projection from March of 6.7 per cent to 7 per cent.

The 6.5 per cent level is significant because the Fed has said it plans to keep the short-term interest rate it controls near zero at least until unemployment falls that low.

Paul Ashworth, an economist at Capital Economics, said the forecasts suggest that most Fed officials now expect that threshold to be reached by early 2015. In March, the Fed's forecasts indicated it wouldn't be reached until the second half of 2015.

The projections also showed that 14 of the 19 members of the Fed's policymaking committee indicated the Fed shouldn't begin raising rates until 2015. Three chose 2014, one this year and one 2016.

Fed officials also expect growth to pick up next year to between 3 per cent and 3.5 per cent, up from their previous projection of 2.9 per cent to 3.4 per cent. Fed policymakers were slightly less optimistic about this year. Growth will be no more than 2.6 per cent, they said, down from their prediction, in March, of 2.8 per cent.

The Fed also expects inflation to dip even further below its 2 per cent target. Inflation will be just 0.8 per cent to 1.2 per cent by the end of this year, they predicted, though it will rise in 2014 and 2015.

Fed policymakers downplayed the low inflation figures in the statement they issued Wednesday (US time), saying they were likely temporary.

Fed chairman Ben Bernanke said during a press conference that the Fed could start scaling back its US$85 billion (NZ$107b) in monthly bond purchases later this year if the economy continues to improve. The reductions would occur in "measured steps" and the purchases could end by the middle of next year, he said. By then, Bernanke said he thought unemployment would be around 7 per cent.

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- AP

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