Fed Leaves Policies Unchanged, Upgrades Economic Forecast

By April 25, 2012Economy

The Federal Reserve Board’s Federal Open Market Committee (FOMC) issued a statement which was mostly unchanged from those of past months. It will preserve its policy of maintaining “exceptionally low” interest rates through late 2014.

It will also continue to rebalance its portfolio toward long-term securities while reinvesting principal payments in mortgage-backed securities. As with past announcements, Jeffrey Lacker, the President of the Richmond Federal Reserve Bank and an “inflation hawk,” dissented.

Much of the economic language was also similar to past statements. The Fed feels that “the economy has been expanding moderately,” with labor and housing markets remaining a challenge despite recent improvements. Consumer spending and business investment are expanding.

In terms of inflationary pressures – a sore point for many manufacturers and individuals lately, especially with higher gasoline prices – the Fed continues to feel that these increases are temporary. It expects for inflation to “run at or below the rate that it judges most consistent with its dual mandate.”

Fed Chairman Ben Bernanke has said that the target core inflation rate is 2 percent. Recent data suggest that core prices have grown by more than 2 percent; therefore, the Fed sees prices stabilizing in the months ahead.

With that said, the Fed does see slightly higher consumer inflation this year, according to its latest economic projections. Core inflation is now seen ranging from 1.8 to 2 percent in 2012, compared to 1.5 to 1.8 percent projected in January. This reflects the recent run-up in energy and raw material prices. At the same time, the Fed has upgraded its estimates for growth this year, with real GDP up 2.4 to 2.9 percent (an improvement from the 2.2 to 2.7 percent suggested earlier).

The unemployment rate in this forecast will decline to 7.8 to 8 percent by year’s end. Still, labor market improvements will be slow, with unemployment falling to as low as 6.7 percent in 2014. Most economists do not expect the economy to get to so-called full employment (between 5 and 6 percent) until at least 2015 or beyond, with the Fed’s forecast consistent with this view.   

Chad Moutray is chief economist, National Association of Manufacturers.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM) and the Director of the Center for Manufacturing Research for The Manufacturing Institute, where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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