Business

Fed lowers its forecast as fuel prices put brakes on economy

WASHINGTON — Federal Reserve officials are more pessimistic about prospects for economic growth and employment than they were two months ago.

In an updated forecast, the Fed estimated Wednesday that the economy will grow between 2.7 percent and 2.9 percent this year. That's down from its April estimate of between 3.1 percent and 3.3 percent. The downgraded revision is an acknowledgement that the economy has slowed, in part because of higher gasoline prices.

Growth at the rate the Fed is projecting won't be enough to significantly lower unemployment, now at 9.1 percent. The Fed estimates that unemployment will still be around 8.6 percent to 8.9 percent by the end of the year.

The Fed's downward revisions were in line with private economists, who have also been scaling back their forecasts to reflect a batch of weaker-than-expected reports in recent weeks. The latest poll of top economists surveyed by The Associated Press showed they expect the unemployment rate will be 8.7 percent at year's end, within the Fed's new estimate, and that the economy will grow 2.6 percent this year.

Growth would need to pick up in the second half of this year to meet even the reduced estimates of the private economists and the Federal Reserve. The economy grew at an anemic 1.8 percent annual rate in the first three months of the year. Many economists believe the economy is expanding only slightly more in the current quarter.

The Fed trimmed the top range for overall inflation in the new forecast. That reflects the fact that the spike in energy prices earlier this year has begun to recede.

The central bank now sees inflation rising 2.3 percent to 2.5 percent this year.

The Fed estimates that "core" inflation, which excludes energy and food, will increase 1.5 percent to 1.8 percent. That's slightly higher than its April forecast. The revised estimate is still within the Fed's comfort zone for inflation. Economists closely watch core inflation, because food and energy prices are volatile.

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