Economy Watch: Fed to Keep Tapering Stimulus, Predicts Slower Growth in 2014

The central bank will reduce purchases of agency-backed securities and Treasuries in July, and also said that the harsh winter would trim growth to between 2.1 percent and 2.3 percent this year.

Much of Wednesday’s economic news emerged from the Federal Reserve, especially the decision by its Federal Open Market Committee to continue tapering the economic stimulus tool known as quantitative easing. In July, the central bank will buy agency-backed securities at a pace of $15 billion per month, down from $20 billion. The Fed will also add to its holdings of longer-term Treasuries at a monthly clip of $20 billion, rather than $25 billion.

The FOMC also said that U.S. economic activity has rebounded in recent months. Labor market indicators show further improvement, though the committee pointed out that the unemployment rate “remains elevated.” The FOMC added that “household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow.”

Sequestration is still on the Fed’s radar, as well. “Fiscal policy is restraining economic growth, although the extent of restraint is diminishing,” the FOMC’s statement explained. Inflation has been running below the central bank’s 2 percent target lately, but longer-term inflation expectations “remain stable,” the FOMC reported.

Fed Lowers Forecast for 2014 GDP

On Wednesday, the Fed also released an economic forecast that offers a more subdued picture than its earlier predictions. The central bank now predicts that the economy will grow between 2.1 percent and 2.3 percent this year. That is a slower pace of expansion compared with previous estimates by the Fed that place growth at between 2.8 percent and 3 percent.

The Fed’s latest projections coincide with a report this week from the International Monetary Fund, which now estimates that GDP will grow 2 percent this year, rather than the 2.8 percent it predicted in April. Both the Fed and the IMF named the harsh winter as the chief culprit for the slower rate of growth. Looking ahead, the Fed is forecasting more robust expansion: between 3 percent and 3.2 percent in 2015 and 2.5 percent to 3 percent in 2016.

The Fed remains relatively optimistic in its outlook for the U.S. unemployment picture. It’s predicting a rate of 6 percent to 6.1 percent by the end of the year, which would be an improvement over the 6.1 percent to 6.3 percent range previously forecast by the central bank. And the Fed’s forecast for core inflation has been revised upward: 1.5 percent to 1.6 percent, instead of 1.4 percent to 1.5 percent.

Wall Street bided its time on Wednesday until getting word from the Fed, and then went on a buying spree, with the Dow Jones Industrial Average up 98.13 points, or 0.58 percent. The S&P 500 gained 0.77 percent and the Nasdaq advanced 0.59 percent.