Fed sees quicker financial progress with solely modest inflation: NPR
Fed Chairman Jerome Powell testifies before a House Financial Services Committee hearing in Washington on December 2, 2020. The Fed released new economic forecasts on Wednesday at the end of its two-day meeting. Jim Lo Scalzo / AP Hide caption
Jim Lo Scalzo / AP
Jim Lo Scalzo / AP
The Federal Reserve expects the US economy to grow faster this year, but only expects a moderate increase in inflation.
The central bank issued its new forecast at the end of a two-day meeting. It comes as the public health outlook is improving, and after Congress approved trillions of dollars in federal spending to help the country recover from the coronavirus pandemic.
Despite the more optimistic forecast, the central bank reiterated public health officials, warning that the pandemic is far from over.
The Fed continues to plan to keep rates near zero for an extended period to support the economy until the labor market has fully recovered and inflation is on track to moderately exceed 2%. Several participants in the meeting suggested that this could happen in 2022 – by just one who believed it did in December.
“The way the economy goes will depend largely on the course of the virus, including progress on vaccinations,” the Fed said in a statement. “The ongoing public health crisis continues to weigh on economic activity, employment and inflation, and pose significant risks to economic prospects.”
A forecast released on Wednesday shows that Fed officials now expect the economy to grow 6.5% this year, compared to 4.2% forecast in December.
Unemployment is expected to fall to 4.5% by the end of the year. This is an improvement on the unemployment rate of 5% forecast three months ago.
Fed officials have warned that the overall unemployment rate underestimates the damage the pandemic has done to the labor market, as it does not include millions of people who have left the labor market.
And despite warnings from some economists that a surge in new spending could trigger a spike in inflation, the Fed is forecasting only modest increases in consumer prices.
Fed officials expect inflation to reach 2.4% by the end of this year, up from the 1.8% forecast in December. Without the volatile food and energy prices, an inflation rate of 2.2% is expected.
For most of the past decade, inflation has not reached the Fed’s 2% target. Prices of some goods are likely to rise faster this year than they did this year, especially when compared to the first few months of the pandemic when prices were depressed. But Fed officials say any spike is likely to be temporary and not a sign that inflation is out of control. Inflation is projected to decline to 2% by 2022.
Since mid-December, when the Fed released its previous forecast, Congress has passed two major pandemic relief bills that total $ 2.8 trillion in federal spending. The measures include direct cash payments to most Americans as well as expanded unemployment benefits.
This should boost consumer spending – a key driver of the overall economy.
At the same time, the decline in new coronavirus infections and the spread of vaccinations later this year should provide more opportunities for travel, entertainment, and other forms of spending that were largely banned during the pandemic.
New infections have fallen sharply since January, although they are still increased. Almost 54,000 people tested positive on Tuesday. The rate of vaccinations has increased to more than 2 million a day.
President Biden said he expected to have enough COVID vaccines available for all adults in the country by the end of May.