WASHINGTON — The Federal Reserve has sharply cut its forecast for U.S. growth this year, reflecting a shrinking economy last quarter caused mostly by harsh weather.
At the same time, the Fed has barely increased its estimate of inflation despite signs that consumer price increases are picking up. Its benign inflation outlook suggests that the Fed doesn’t feel rising pressure to raise short-term interest rates.
The Fed updated its economic forecasts Wednesday after a two-day policy meeting.
It expects growth to be just 2.1 percent to 2.3 percent this year, down from 2.8 percent to 3 percent in its last projections in March.
Given that analysts think the economy shrank at up to a 2 percent annual rate in the January-March quarter, the Fed’s forecast implies that growth will top a healthy 3 percent rate over the final three quarters of 2014, economists noted.
The Fed thinks inflation will be a slight 1.5 percent to 1.7 percent by year’s end, near its earlier estimate.
Still, more Fed members than in March expect the central bank’s short-term rate to be 1 percent or higher by the end of 2015. That points to the prospect of more members advocating higher interest rates next year. Fed policymakers’ average forecast for short-term rates in 2016 also edged up.
But Fed members think short-term rates will be lower in the long run than they did three months ago. That may reflect Chair Janet Yellen’s view that rates will remain at historically low levels even after the unemployment rate falls back to its longer-term average because the economy may remain weak.
The Fed foresees the unemployment rate, now at 6.3 percent, dipping to between 6 percent and 6.1 percent by the end of this year. That’s a slight improvement from the Fed’s forecast in March, when it predicted that unemployment would be as high as 6.3 percent at year’s end.
The central bank updates its economic projections four times a year. The forecasts serve as guides for its interest rate decisions.