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Fed Lowers Growth Forecast But Says Economy Rebounding

The U.S. central bank says economic growth is rebounding after stalling in the first few months of the year. But as expected, the U.S. Federal Reserve lowered its growth forecast for 2014 from three percent to only slightly more than two percent. Despite the weaker outlook, Fed Chair Janet Yellen expressed confidence in the U.S. recovery.

The U.S. Federal Open Market Committee concluded its two-day policy meeting in Washington with assurances that the economy remains on solid footing. Despite a one-percent contraction in the first quarter, Fed Chair Janet Yellen said consumer spending and factory output picked up in the second quarter.

“The Committee thus believes that economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter,” said Yellen.

In addition, unemployment has fallen more rapidly than the Fed expected, while inflation is still below the Fed’s target rate of two percent. That means the economy is healthy enough for the Fed to keep reducing monthly bond purchases that help stimulate the economy and keep interest rates near record lows.

“Starting next month, we will be purchasing $35 billion of securities per month, down $10 billion per month from our current rate,” said Yellen.

U.S. stocks rose sharply after the Fed announcement -- partly because there were few surprises and partly because the central bank vowed to keep interest rates near record lows until at least the middle of next year. That’s welcome news for businesses and consumers, according’s Greg McBride who spoke via Skype.

“In all likelihood, those interest rates are going to start to move up and at this point, it looks like that’ll be next year. So use this opportunity while you can, that tailwind of low interest rates, to accelerate your debt repayment so that you’re not having to do so in a less favorable interest rate environment next year or the year after.”

One drawback, say economists, is that low interest rates could spur inflation. Even though this hasn't happened yet, many worry that rising prices and stagnant wage growth could slow consumer spending and further hamper an already lackluster recovery.