FOMC Says Tapering to Continue

Much of the recent economic news came from the Federal Reserve, especially the fact that the Federal Open Market Committee has decided to continue tapering its stimulus of the economy.

Much of the economic news on Wednesday came from the Federal Reserve, especially the fact that the Federal Open Market Committee has decided to continue tapering its stimulus of the economy (QE3, to use a slightly quaint term). In July, the central bank is going to buy agency mortgage-backed securities at a pace of $15 billion a month rather than $20 billion a month, and it will add to its holdings of longer-term Treasuries at a clip of $20 billion per month rather than $25 billion.

The FOMC also says that U.S. economic activity has rebounded in recent months, with labor market indicators showing further improvement, though the committee admitted that the unemployment rate “remains elevated.” The FOMC’s statement also notes that “household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow.”

The Fed hasn’t forgotten about sequestration, either. “Fiscal policy is restraining economic growth, although the extent of restraint is diminishing,” it says. Inflation has been running below the central bank’s 2 percent target—lower than that lately, in other words—but longer-term inflation expectations “remain stable.”

Fed lowers forecast for 2014 GDP

The Fed also reported its revised forecast for the U.S. economy on Wednesday. The central bank is now predicting that the economy will expand by only 2.1 percent to 2.3 percent, compared with its previous prediction of 2.8 percent to 3 percent, blaming it on the tough winter of 2014. The projections for 2015 and ’16 are for GDP growth of 3 percent to 3.2 percent, and 2.5 percent to 3 percent, respectively.

The Fed is relatively optimistic in its estimate for the U.S. unemployment rate by the end of 2014. It’s predicting a rate of 6 percent 6.1 percent, as opposed to the 6.1 percent to 6.3 percent previously forecast. The 2014 core inflation rate forecast has been revised upward: 1.5 percent to 1.6 percent, instead of 1.4 percent to 1.5 percent.

Separately, the International Monetary Fund reported this week that its forecast for U.S. GDP in 2014 is 2 percent, compared to the 2.8 percent the IMF predicted in April. The weak first quarter, mainly because of the harsh winter, dragged down the overall outlook.

Wall Street didn’t do much on Wednesday until investors had word from the Fed, and then went on a buying spree, with the Dow Jones Industrial Average up 98.13 points, or 0.58 percent. The S&P 500 gained 0.77 percent and the Nasdaq advanced 0.59 percent.