Fed 2012 GDP Growth Forecast Worsens; Unemployment Forecast Unchanged

Chip Somodevilla/Getty Images(WASHINGTON) -- Among its announcements Thursday was the Fed’s prediction for unemployment, GDP growth and inflation rates.
 
The Federal Reserve still thinks unemployment won't fall below eight percent this year.  The unemployment rate is currently 8.1 percent.  But the central also says that next year the unemployment rate could fall to 7.6 percent and down to 6.7 percent in 2014.
 
Inflation, the Fed says, will likely remain at or below two percent for the next three years.
 
As for GDP, the Fed has changed its previous forecast to expect slower growth this year, but expects a somewhat better situation in coming years.
 
The Fed now expects growth to be no stronger than two percent this year. That's down from its forecast of 2.4 percent in June.  The Fed says growth will accelerate next year to as much as three percent, up from June's forecast of as much as 2.8 percent. For 2014, the Fed projected growth between three percent and 3.8 percent.
 
The Fed may be taking into account the effects of its newly announced QE3 on future growth in its new forecasts.  All this being said, predictions are generally risky business, let alone those looking as far out as 2014.
 
For those looking for further explanation on how QE3 might work:
 
The Fed wants to get money moving in the economy, which is stuck in many ways.
 
Until now, the Federal Reserve was buying up Treasury bonds.  This depresses the interest rate available on these bonds and prices of assets like stocks go up.  The hope then is that people find they are worth more (401(k)s go up) and businesses can borrow at lower rates.  People and businesses then spend more, boosting output and hiring.  This has worked to some extent in the past in the other two rounds of easing since the financial crisis began in late 2007.
 
The Fed has been criticized for buying Treasury bonds to finance the U.S. debt.  So perhaps to avoid that criticism the Fed is now buying mortgage-backed securities.
 
The intended effect is similar to buying Treasury bonds -- as the Fed says, to “put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
 
Buying mortgage-backed securities could take these off banks’ books, possibly boosting lending and spending. Consumers may find it easier to refinance and buy new homes.  All of these things have a ripple effect on the economy.  As the economy grows, hiring grows.
 
By saying they may keep doing what they are doing until the ripple effect gets to the job market, the Fed is hoping to provide some certainty to employers and investors.
 
The gridlock in Washington makes the Fed one of the few entities able to do anything right now to help the economy. Thursday’s action is not expected to do much, but it’s one of the few moves available to policymakers.
 
Copyright 2012 ABC News Radio

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