Fed Econ Forecasts Suggest Moderate Growth, Low Inflation

WASHINGTON (Dow Jones)--Federal Reserve officials generally expect a soft-landing scenario with moderate economic growth, stable inflation and low unemployment through 2010, though they acknowledged that greater uncertainty surrounds their growth forecasts. The forecasts, released for the first time Tuesday under the Fed's new quarterly release schedule and three-year forecast horizon, also suggest that officials have grown more pessimistic about the economy's ability to achieve the type of rapid, noninflationary growth that it did in the late 1990s and early this decade. They also signal that officials have an informal inflation goal of a little less than 2% over the medium term. Federal Open Market Committee members lowered their 2008 gross domestic product growth forecast to between 1.8% and 2.5% from their previous forecast in June of 2.5% to 2.75%, the Fed said Tuesday. That downward revision "stemmed from a number of factors, including the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than- expected housing data, and rising oil prices," the Fed said in a statement accompanying its forecasts. FOMC forecasts used to be released twice a year with a two-year horizon. They are presented as a central tendency, meaning the highest three and lowest three of FOMC members' forecasts were excluded. The range of GDP forecasts for next year varied widely, from 1.6% to 2.6%. "The dispersion of participants' projections for growth next year seemed largely to reflect differing assessments of the likely depth and duration of the correction in the housing market, the effect of financial market disruptions on real activity outside of the housing sector, and the speed with which financial markets will return to more normal functioning," the Fed said. The FOMC sees GDP this year up 2.4% or 2.5%, suggesting that after robust growth in the second and third quarters, officials foresee a marked slowdown this quarter to only around 1.5%. The Fed expects GDP to grow between 2.3% and 2.7% in 2009 and 2.5% to 2.6% in 2010. Wall Street economists are eying the 2010 forecasts as a proxy for how fast the Fed thinks the economy can grow over the long run without boosting inflation. Growth in the 2.5% to 2.6% range is well below previous estimates of the economy's growth potential that once exceeded 3%. Indeed, even growth in the mid-2% range should keep the unemployment rate below 5%, according to the Fed's forecasts, another indication that officials think the growth potential is lower now. Inflation is expected to stay under wraps, with the Fed's preferred inflation gauge - the price index for personal consumption expenditures excluding food and energy - rising between 1.8% and 1.9% this year and 1.7% to 1.9% in 2008. Both of those forecasts were lower than in June. Officials expect core inflation to hover between 1.7% and 1.9% in 2009 and 1.6% to 1.9% in 2010. As is the case with GDP, the Fed's 2010 inflation forecasts will be viewed by Wall Street as an unofficial inflation target. "Participants' projections further out were also influenced by their views about the rate of inflation consistent with the Federal Reserve's dual mandate," the Fed stated. Annual core PCE growth is currently within that 1.6% to 1.9% range, at 1.8% through September. Officials also expect headline PCE to be between 1.6% and 1.9% in 2010, though headline PCE is expected to top the core this year and next as energy prices remain elevated.