The Federal Reserve upgraded its outlook Tuesday, saying it expects the economy to grow moderately this year, but the central bank held to its forecast that interest rates will likely stay near zero until at least 2014.
In its statement after a one-day meeting, the Fed’s policy-making committee said although oil and gasoline prices have risen lately, it expects the increase to have only a short-term effect on inflation.
“The committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually” toward normal levels, the Fed said.
In January, policymakers appeared less optimistic, forecasting “modest” growth this year of 2.2% to 2.7%.
A report on retail sales Tuesday added further evidence that the economy may be shifting into a higher gear.
The Commerce Department said retail sales rose 1.1% in February — in line with economists’ estimates — as consumers largely shrugged off higher gasoline prices and increased spending on cars, clothing, sporting goods and building materials. Sales, excluding autos, beat estimates by rising 0.9% and sales for the prior two months were revised slightly higher. The report supplemented other recent data showing increased activity in the manufacturing and service sectors and improved consumer confidence.
Fed policymakers, meanwhile, provided a more buoyant view of the labor market, saying “the unemployment rate has declined notably in recent months,” but it “remains elevated.” The jobless rate has fallen to 8.3% from 9.1% since August as employers added an average 200,000 jobs a month.
In a nod to the eurozone’s recent agreement to restructure Greece’s massive debt and provide the troubled country with additional bailout money, the Fed said “strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.”
The Fed said both household spending and business investment have picked up, but the “housing sector remains depressed.”
Along with keeping interest rates near zero, the Fed said it will continue a policy it announced in September to shift its portfolio of government bonds to longer-term maturities to lower long-term interest rates and spur home and other purchases.
Richmond Fed President Jeffrey Lacker was the lone dissenter, saying the Fed should not say interest rates will likely stay near zero until 2014.
Despite the recent uptick in economic indicators, many experts believe the Fed will launch another round of bond purchases later this year to further stimulate growth due to headwinds the economy still faces. Those include a sluggish housing market, rising gasoline prices, anticipated federal budget cuts, and European financial turmoil.
In February, Fed chairman Ben Bernanke told Congress “the job market remains far from normal,” with still-high unemployment and more than 40% of those unemployed out of work at least six months.
The Fed statement on Tuesday “neither takes a step toward nor backs away from” more bond purchases, RDQ Economics said in a research note.