Fed Cuts Outlook for 2012, Sees 8.6% Jobless

By Craig Torres - Nov 3, 2011 1:32 AM GMT+0700

Federal Reserve officials lowered their outlook for U.S. economic growth in 2012 and forecast that unemployment will average from 8.5 percent to 8.7 percent in the final three months of next year.

The forecasts were released after the Federal Open Market Committee today acknowledged economic growth “strengthened somewhat” in the third quarter while also citing “continuing weakness” in labor markets and “significant downside risks” to the economic outlook. The committee left unchanged its plans to lengthen the maturity of its bond portfolio and maintain its mortgage-backed securities investments, and keep the federal funds rate in a range of zero to 0.25 percent until mid-2013.

Chicago Fed President Charles Evans dissented in favor of “additional policy accommodation.”

Forecasts for 2012 growth in U.S. gross domestic product from the five Fed Board members and 12 reserve bank presidents centered around 2.5 percent to 2.9 percent, measured from the fourth quarter of this year to the fourth quarter of next year. For this year, the central tendency forecast for U.S. growth was 1.6 percent to 1.7 percent.

At a press conference today, Fed Chairman Ben S. Bernanke said “the pace of progress is likely to be frustratingly slow,” with concerns about Europe contributing to “strains” in financial markets.

The Fed marked down the forecasts as the weak U.S. housing market, unemployment persisting around 9 percent and Europe’s debt crisis sap consumer and investor confidence. The Bloomberg Consumer Comfort Index for the week ended Oct. 23 fell to the lowest in a month, and 95 percent of survey respondents had a negative opinion about the economy, the worst since April 2009.

Economy Grew

Some reports in October indicate the recovery strengthened in recent months. The economy grew in the third quarter by 2.5 percent, the fastest pace in a year, as Americans reduced savings to boost purchases and companies increased investment in equipment and software, the Commerce Department reported last week. Growth rose from a 0.4 percent annual rate in the first quarter and 1.3 percent in the second quarter.

FOMC participants said inflation, measured by the personal consumption expenditures price index, would rise at a 1.4 percent to 2 percent rate in 2012, according to the central tendency outlook, which excludes the three highest and three lowest projections. They kept their longer-run inflation goal in a range of 1.7 percent to 2 percent.

Fed officials in June forecast growth of 2.7 percent to 2.9 percent for 2011. Today’s lower central tendency outlook for this year represents the third consecutive downward revision by Fed officials to the 2011 outlook. They also cut their 2012 outlook from a previous forecast of 3.3 percent to 3.7 percent in June.

Shaved Estimate

Fed officials also shaved their estimate for the economy’s long run potential growth rate to 2.4 percent to 2.7 percent versus a previous forecast of 2.5 percent to 2.8 percent in June.

The unemployment forecast for next year was higher than participants’ June forecast of 7.8 percent to 8.2 percent. For 2013, participants forecast unemployment of 7.8 percent to 8.2 percent, a higher range than their June central tendency outlook of 7 percent to 7.5 percent.

The FOMC eased policy in August and September without providing investors with new details about their economic outlook.

Before making policy decisions, Fed officials review a staff forecast that isn’t made public. Today’s forecasts show the central bank is realigning its outlook with a series of downgrades already made by private forecasters focusing on weak levels of job creation and shocks to consumer wealth and confidence from financial volatility.

In a survey published Oct. 10 by Blue Chip Economic Indicators, for example, economists expected GDP to rise 1.4 percent this year. JPMorgan Chase & Co. (JPM) economists expect the economy to grow 1.7 percent in the fourth quarter from the same quarter a year earlier. The firm also expects 1.7 percent growth in 2012 on a fourth-quarter to fourth-quarter basis, partly due to “significant fiscal headwind,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net