The Federal Reserve is increasingly optimistic about the economy. This week it predicted that unemployment will fall from its current level of 7.6% to somewhere between 6.5% and 6.8% by the end of 2014. That is more optimistic than the 6.7% to 7% projection they offered in March.
If the unemployment rate goes down to 6.5% or below, the Fed has previously said they may raise the short-term interest rate. Until that time they have promised to keep the rate near zero in hopes of stimulating the economy. Economists forecast that the interest rate could be raised sometime early in 2015, if the Fed’s current predictions bear out.
Of the 19 members of the Federal Reserve policy committee, 14 said they don’t think rates should be raised until 2015. Three members said they should be raised earlier, in 2014, one member said they should be raised this year, and one was in favor of waiting until 2016.
Still buying bonds
Leading up to the latest Fed statement, there was much speculation about whether the Fed would continue its purchase of Treasury securities and agency mortgage-backed securities. Chairman Ben Bernanke said that they will continue to purchase agency mortgage-backed securities at a rate of $40 billion a month and longer-term Treasury securities at a rate of $45 billion per month. As the economy improves, however, Bernanke said they will reevaluate the program with an eye toward scaling it back.
Low inflation could be temporary; growth to come next year
The Fed expects the economy to grow in 2014. Projected growth is between 3% and 3.5%. But for the rest of this year, growth will be slower, at not more than 2.6%.
Although inflation is already low, the Fed expects it to drop even further, below their 2% target rate. By the end of 2013 they say inflation could sit at 0.8% to 1.2%, but they predict this will be temporary. Inflation is expected to rise in 2014 and 2015.
Conference Board figures are favorable
Numbers also came out this week from the Conference Board, which posted a modest gain of 0.1% in May after a bigger jump of 0.8% in April. The May index was influenced by higher stock prices. Conference Board indexes, which forecast economic conditions three to six months in the future, have been steadily rising since December 2012—a good sign for the economy.
The housing market and consumer behavior will factor into whether these gains continue to offset government spending cuts and other unfavorable economic conditions.