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FOMC Cuts Growth Forecast, Raises Estimates For Unemployment
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Federal Reserve officials Wednesday expressed more gloom over the economy compared to June, predicting unemployment could still remain above 7% through 2014.

However, the bleaker outlook wasn't enough to prompt new steps to try and boost the economy. Fed officials remain divided over the right course of action and the economy has actually picked up a little recently, after hitting a wall during the summer.

The Fed projected the economy will expand by about 2.7% in 2012, 3.3% in 2013 and 3.5% in 2014, after growing by between just 1.6% and 1.7% this year. In June, the central bank had forecast gross domestic product would rise by about 2.8% this year, 3.5% in 2012 and 3.9% in 2013. No 2014 prediction was provided in June.

The forecasts are based on the midpoint of the core, or "central tendency," expectations of central bankers that were released after the Federal Open Market Committee's monetary policy decision earlier Wednesday. The latest projections made by Fed governors and regional bank presidents produced a central tendency of between 2.5% and 2.9% for economic growth next year, down from a range of 3.3% to 3.7% in June.

Given the subdued pace of growth, the unemployment rate is expected to come down only gradually from the 9.1% level registered in September. The central bank sees the jobless rate at 9.0% to 9.1% in the final quarter of this year and 8.6% at the end of 2012, when Americans will decide who their next president will be.

Unemployment is then seen edging down to 8.0% at the end of 2013, but to still be between 6.8% and 7.7% by the end of 2014, more than five years after the recession's end.

Most Fed officials believe the economy's persistent weakness will keep prices at bay. Inflation is seen edging down to some 1.7% in 2012 after rising to about 2.8% in 2011, following a surge in the price of oil and other commodities at the start of this year.

The price index for personal consumption expenditures, the Fed's preferred measure of inflation, is expected to then settle to between 1.5% to 2.0% in 2013 and 2014. That's around the Fed's comfort zone of around 2%.

Such a bleak jobs outlook with little price pressures would normally prompt the Fed to act. However, many officials, including Fed Chairman Ben Bernanke, believe it's Congress and the White House which should do more to aid the economy now that interest rates are already so low. What's more, the economy seems to have picked up a little in the third quarter, giving the Fed time to assess the impact of steps taken in August and September to boost growth.

Indeed, the Fed's policy statement Wednesday noted that the economy had "strengthened somewhat" last quarter. But the central bank warned of "significant" risks to the downside and predicted that the pace of the recovery would remain moderate, with the jobless rate declining "only gradually."

The Fed's new forecasts on unemployment and inflation are important because the central bank is considering using them more explicitly to signal future policy moves--and, in turn, to influence the economy. Discussions at the Fed's policy-setting meeting Tuesday and Wednesday included ways in which the central bank could reduce public uncertainty about when interest rates may rise.

In August, the Fed made a conditional pledge to keep short-term rates close to zero until mid-2013, in an effort to get consumers and companies to borrow and spend more. Now, it's considering making that pledge more explicit by saying that rates won't rise until unemployment falls under a certain level and as long as inflation doesn't rise too much.

Chicago Fed President Charles Evans wants the Fed to commit to near-zero short-term rates until unemployment falls below 7% or until officials expect inflation to rise over the next two or three years to above 3% per year. However, it may take a little more for a majority of officials to agree on specific levels because the debate within an already divided Fed has begun only recently.

-By Luca Di Leo and Tom Barkley, Dow Jones Newswires; 202-862-6682; luca.dileo@dowjones.com