Does the Fed now foresee greater inflation and financial market volatility ahead?
“Federal Reserve officials raised their projections for economic growth and inflation this year after government rebate checks aided consumer spending while oil prices rose to fresh records.
Policy makers estimate U.S. gross domestic product will increase by 1.0 percent to 1.6 percent this year, compared with the 0.3 percent to 1.2 percent growth they predicted in April, according to a Fed report today. Consumer prices, including food and energy costs, are projected to rise by 3.8 percent to 4.2 percent, up from the April forecast of 3.1 percent to 3.4 percent.
The Fed reiterated projections for faster growth and a drop-off in inflation next year. The estimates reflect the June 25 assessment by Fed policy makers that risks of slower growth had ‘diminished somewhat,’ while the danger of faster inflation and unmoored price expectations had increased. Chairman Ben S. Bernanke said in related testimony today that Fed officials must be ‘particularly alert’ to signs of broader inflation.
Most Fed officials saw growth risks as ‘weighted to the downside,’ while inflation risks were ‘weighted to the upside,’ the central bank said in the report. ‘In addition, participants expressed noticeably more uncertainty about their inflation projections’ than in the previous two forecasts of January and April, the Fed said.”