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Fed forecasts future

By Sheyna Steiner · Bankrate.com
Thursday, January 26, 2012
Posted: 3 pm ET

The Fed meeting this week brought a couple of changes to the economic projections from the Federal Reserve.

The projections are released four times per year and typically include forecasts for the direction of the gross domestic product, unemployment and inflation. This week's new additions incorporate forecasts of the federal funds rate, including where participants believe the rate should be at year-end for the next three years as well as when they believe will be the appropriate time to begin raising rates.

The charts that are usually included received short shrift yesterday in Bankrate's Fed coverage, but they revealed how widely varied opinions are in the committee.

The first chart illustrates the projections for changes in gross domestic product, or GDP. Some committee members see growth rebounding well through the end of the year and cresting 3 percent. Other forecasts call for flatter growth through 2012.

Change in real gross domestic product
Change in real gross domestic product

Source: Federal Reserve

The central tendency shows that the majority believe that GDP will continue to grow at a slow-to-moderate pace.

The path of the unemployment rate shows that some optimistic members forecast a steady abatement through the year and into the next two years. The central tendency shows that most participants believe that the unemployment rate will slightly decrease this year and gradually decline over the next two years.

Unemployment rate
Unemployment rate

Source: Federal Reserve

The committee sees "unemployment in the long-term being somewhere between 5.2 to 6 percent what we might call in there the natural rate of unemployment," says John Stewart, managing director of Vantage Economics, an economics consulting firm.

For personal consumption expenditures inflation, the central tendency calls for a sharp dip in 2012 and then flattening out over coming years. Some committee members put inflation on a steady course at least through this year.

Personal consumption expenditure inflation rate
Personal consumption expenditure inflation rate

Source: Federal Reserve

In the press conference on Wednesday, Federal Reserve chairman, Ben Bernanke, did mention that deflation could portend extra stimulus from the central bank.

Their target inflation rate is 2 percent, as was announced in the statement released prior to the press conference. That was a first for the central bank and was a stated goal of the chairman.

From the statement:

The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

"The Federal Reserve works under the dual mandate of maximum employment and stable prices and it's always been sort of implied that when you look at inflation and stable prices, the long-run personal consumption expenditure inflation rate should be at about 2 percent," says Stewart.

"They see that as being conducive, in the long run, to maximum employment," he says.

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