The Federal Reserve has cut its economic outlook for 2013 but says the unemployment rate is likely to fall faster than previously expected. In a statement following a two-day meeting of central bank policy makers, Fed Chairman Ben Bernanke reassured financial markets, saying long-term interest rates would remain low for the foreseeable future.
Despite a strong pickup in manufacturing and a much-improved housing market, the outlook for the U.S. economy remains mixed. The Federal Reserve said U.S. growth is unlikely to exceed 2.8 percent in 2013.
On the other hand, Bernanke expects U.S. unemployment will fall faster than expected – to as low as 7.3 percent by the end of this year.
“Private payrolls are growing more quickly, total hours have increased, the rate of filings and new claims for unemployment insurance has fallen, and the unemployment rate has continued to tick down,” Bernanke said.
But persistent concerns about government spending cuts, tax hikes, and new signs of instability in Europe continue to weigh on the central bank. As a result, the Fed plans to keep its $85 billion-a-month bond buying program to keep long-term interest rates near zero. The low rates have contributed to an extended winning streak on Wall Street.
“The stock market right now is really addicted to this Fed stimulus. I mean if the Fed had given any indication that they were thinking of scaling back the stimulus, the stock market would have sold off very sharply, but instead the market is up,” said Greg McBride at Bankrate.com
McBride says that’s because low interest rates encourage spending and investments in riskier assets. While low rates can help boost economic growth, they can also fuel inflation.
Barring a sharp increase in prices, the Fed expects to keep interest rates low until the jobless rate falls to 6.5 percent.
Most experts say that’s not likely to happen until at least 2015.