Unemployment rate to remain high, Fed says
BY MARTIN CRUTSINGER Associated Press
Thursday, December 13, 2012
12/13/12 at 6:35 AM
WASHINGTON - The Federal Reserve projects the unemployment rate will stay elevated until late 2015, suggesting it will keep short-term interest rates low.
The latest forecasts released Wednesday after the Fed's final meeting of the year were little changed from September. But they coincided with a new communication strategy announced by the Fed that links future interest rate hikes with unemployment below 6.5 percent.
The unemployment rate was 7.7 percent in November.
The central bank said that it expects economic growth to improve next year but that it will be no stronger than 3 percent. Growth could increase to 3.5 percent in 2014 and 3.7 percent in 2015.
Unemployment will fall no lower than 7.4 percent next year and 6.8 percent by the end of 2014, the Fed projects. The earliest the Fed sees unemployment dropping below 6.5 percent is the end of 2015.
The Fed said it plans to keep its key short-term interest rate near zero as long as unemployment remains above 6.5 percent and inflation stays below 2.5 percent.
The latest forecast projects inflation will stay at or below 2 percent for the next three years. That gives the Fed more leeway to pursue aggressive stimulus measures.
In an effort to drive the unemployment rate lower, the Fed said it will spend a total of $85 billion a month to sustain an aggressive drive to keep long-term rates low. The goal is to encourage more borrowing and spending, which drives economic growth.
The Fed said it will continue buying bonds until the job market shows substantial improvement.
The projections made no mention of the "fiscal cliff."
Fed Chairman Ben Bernanke said that if a budget agreement can be reached, next year could be "a very good one for the American economy."
Fear of higher taxes has yet to slow hiring. Employers added 146,000 jobs last month. That's about the same as the average monthly gain of 150,000 in the past year.
The unemployment rate fell to a four-year low of 7.7 percent last month from 7.9 percent in October. But the decline was mostly because more people without jobs gave up looking for work. The government only counts people as unemployed if they are actively searching.
Original Print Headline: Fed predicts jobless rate to remain high
Bernanke: 'Fiscal cliff' already hurting economy
The nation's economy is already being hurt by the "fiscal cliff" standoff in Washington, Federal Reserve Chairman Ben Bernanke said Wednesday.
But the steep tax increases and spending cuts can be avoided with a successful budget deal, he said during a news conference after the Fed's final meeting of the year.
Bernanke said the uncertainty surrounding the resolution is already affecting consumer and business confidence. And it has led businesses to cut back on investment.
"Clearly the fiscal cliff is having effects on the economy," the Fed chairman said.
Bernanke said the most helpful thing that Congress and the Obama administration can do is resolve the issue quickly.
"I'm hoping that Congress will do the right thing on the fiscal cliff," Bernanke said. "There is a problem with kicking the can down the road."
Bernanke repeated his belief that if the scheduled tax hikes and spending cuts do take effect in January, they will have a significantly adverse effect on the economy, regardless of what the Fed might do.
"We cannot offset the full impact of the fiscal cliff," he said. "It's just too big."
Job seekers line up at a career fair in New York. The Federal Reserve projects the unemployment rate will stay elevated until late 2015, suggesting it will keep short-term interest rates low for the next three years. Associated Press file