Federal Reserve sees slower economic growth in 2012, but lower unemployment rate

01/25/2012 02:32 EST | Updated 03/26/2012 05:12 EDT
WASHINGTON - The Federal Reserve has slightly reduced its outlook for U.S. economic growth this year but is a little more optimistic about the unemployment rate.

The Fed expects the economy to grow between 2.2 per cent and 2.7 per cent in 2012, according to its updated economic forecasts released Wednesday. That's down from November's forecast of between 2.5 per cent and 2.9 per cent.

Many economists expect Europe will suffer a recession this year, which will slow U.S. growth.

Earlier Wednesday, the Fed noted the weak but growing economy when it said it doesn't plan to raise its benchmark interest rate until late 2014. And some members wanted to push that back even further, according to new interest rate projections released with the quarterly forecasts.

Still, the Fed said it expects unemployment to fall low as 8.2 per cent. That's an improvement from November's bottom rate of 8.5 per cent.

In December, the unemployment rate fell to 8.5 per cent — the lowest level in nearly three years — after the sixth straight month of solid hiring.

Inflation has been relatively tame and the Fed doesn't see that changing over the next three years.

And for the first time, the Fed offered an official target for inflation — 2 per cent — in a statement of its long-term policy goals. It had previously indicated that inflation between 1.7 per cent and 2 per cent was acceptable.

The Fed did not specify a target for unemployment. But it said that unemployment between 5.2 per cent and 6 per cent would be consistent with its goal for a healthy economy.

The updated quarterly forecasts also showed that some Fed members wanted to extend the period of record-low interest rates beyond 2014. Eleven of the 17 members said they don't see interest rates rising until at least 2015. Only 10 members have a vote on the policy committee.

The Fed said record-low rates are still needed to help boost an improving but still sluggish economy. The extended timeframe is a shift from the Fed's previous plan to keep the rate low at least until mid-2013.

The economy is looking a little better, according to recent private and government data. Companies are hiring more, the stock market is rising, factories are busy and more people are buying cars. Even the home market is showing slight gains after three dismal years.

Still, the threat of a recession in Europe is likely to drag on the global economy. And another year of weak wage gains in the United States could force consumers to pull back on spending, which would slow growth.

Private economists forecast that the nation's economy to grow just 2 per cent in the first three months of the year, in part because of the recession in Europe. For the year, they expect growth of 2.4 per cent, according to a survey by the Associated Press. That's sluggish for a recovery. But it is better than last year's likely pace of below 2 per cent.