Federal Reserve officials on Thursday marked down their projections for economic growth and pushed back their predictions for tightening monetary policy, a reflection of recent turmoil in global markets.
The projections, released Thursday afternoon after a two-day meeting of the central bank’s monetary policy committee, showed that Fed officials expect economic growth to slow for 2016 and 2017. Gross domestic product will grow by 2.3 percent and 2.2 percent in those years, down from early group projections of as high as 2.7 percent and 2.5 percent. The projections did note an improvement in this year’s growth, thanks to revisions adding to calculations of GDP earlier in the year.
Fed members also see inflation lower than previously expected, at just 0.4 percent this year. They see inflation at 1.7 percent next year, only slightly down from a projected 1.6 to 1.9 percent in June.
The lowered expectations are an acknowledgement that the Fed overestimated economic growth and the cyclical recovery, as it has several times since the recession.
By marking down their projections, however, Fed officials also signal to the markets that they are likely to provide more monetary stimulus in the months ahead.
They made that explicit in their projections, predicting that the Fed will raise its short-term interest rate more slowly than previously thought. Most see a shallower increase to 3.5 percent in the long run, down from 3.8 percent estimated in June.
The officials, who include both members of the Fed’s Board of Governors and presidents of regional banks, are not identified by name in the projections. Four of the unidentified officials now expect no rate hikes this year, up from two in June. One doesn’t see a hike until 2017.
At least one Fed official actually sees the interest rate target moving down in the months ahead, to negative territory. That would be unprecedented.
The downgrade of projections Thursday follow recent signs of trouble in China and volatility in markets in the U.S. and abroad. Some Fed members, in recent weeks, expressed the concern that those factors could signal a slowdown in the real economy. The dollar has appreciated sharply since June, slowing U.S. exports.
In addition to those events, some of the signs Chairwoman Janet Yellen and other Fed members had hope for failed to materialize over the past three months.
One is rising inflation. Core inflation, a measure which sets aside energy and food prices, was just 1.2 percent in the most recent reading of the Fed’s preferred gauge, a four-year low and well below the Fed’s 2 percent target.
Another is wage growth acceleration. In June, Yellen said that she saw “tentative signs” of faster earnings growth, but subsequent reports have shown slower gains.
One economic indicator that has improved even faster than the Fed expected, however, is the unemployment rate.
At 5.1 percent in August, the unemployment rate was lower than the Fed thought it would be by the end of the year when they issued their June projections. Now, they see it at 5 percent by year end.
