Fed lowers growth, raises unemployment forecasts

WASHINGTON – The Federal Reserve has lowered its growth forecasts and raised its unemployment projections, suggesting the economy has a longer path to recovery.

The central bank's latest forecast released Wednesday predicts that the economy will grow just 1.6 percent to 1.7 percent for all of 2011. For 2012, growth will range between 2.5 percent and 2.9 percent. Both forecasts are roughly a full percentage point lower than the Fed's projections from June.

The unemployment rate has been stuck near 9 percent for more than two years. The Fed doesn't see that changing this year. It predicts it will fall between 8.5 percent and 8.7 percent next year. In June, the Fed had predicted unemployment would drop next year to as low as 7.8 percent.

The new forecast takes into account the substantial slowdown in growth that occurred earlier this year.

On inflation, the Fed expects consumer prices will increase no more than 2.9 percent this year — slightly worse than June's forecast. That's largely because of a spike in food and gas prices that occurred earlier this year.

But the Fed sees inflationary pressures receding in 2012. It projects prices will rise between 1.4 percent and 2 percent next year. That's within the Fed's target range. It expects roughly the same inflation when stripping out food and energy prices.

Policymakers were more optimistic about the economy in June. At that time, Fed officials thought temporary factors, such as high gas prices and supply chain disruptions, were to blame for sluggish growth.

But over the summer, the government said the economy barely grew in the first half of the year, the first of many signs that stoked fears of another recession. Consumer confidence plunged, the debt crisis in Europe roiled global financial markets and U.S. lawmakers fought over raising the borrowing limit.

Since then, the outlook has improved slightly. The government last week said the economy grew at an annual rate of 2.5 percent in the July-September quarter, the best quarterly growth in a year. That was largely because consumers increased their spending at triple the rate from the previous quarter.

Many economists believe the economy in the current October-December quarter is growing at a similar pace of around 2.5 percent.

The growth is strong enough to show that the economy isn't about to slide into recession. Still, growth would have to be nearly twice as high — consistently — to make a major dent in the unemployment rate.

The Fed noted the improved economic picture in its policy statement issued after its two-day meeting. As a result, it said it would hold off on any new actions because stronger growth is giving it time to gauge the impact of steps it's already taken.

After their September meeting, the policymakers said they would shuffle the Fed's investment portfolio to try to further reduce long-term interest rates. And in their previous meeting in August, they had said they plan to keep short-term rates near zero until at least mid-2013, unless the economy improved.