Federal Reserve policymakers offered a more upbeat assessment of the economy… (JIM LO SCALZO, EPA )
WASHINGTON — The Federal Reserve upgraded its outlook for the economy, predicting the unemployment rate would fall to as low as 7.8% in the fourth quarter — a drop that could have a significant effect on the presidential election.
Just three months ago, most Fed policymakers expected the nation's jobless figure to be 8.2%, its current rate, or higher in the last three months of the year.
The improved outlook, issued Wednesday at the end of a two-day Fed meeting, reflects a sharper-than-expected drop in unemployment in recent months and projections for slightly faster economic growth this year, including some improvement in the downtrodden housing market.
Nonetheless, the U.S. economy will expand only moderately over coming quarters, the central bank said in a policy statement that accompanied the new quarterly forecast.
Fed officials voted 9 to 1 to stick with their existing easy-money policies, reaffirming a pledge to keep short-term interest rates at record lows through 2014. The Fed's federal funds rate, which has been near zero since late 2008, influences loan rates for businesses and consumers.
The Fed's statement didn't indicate that additional efforts to boost the economy were on the way.
Some economists and critics have argued strenuously that the Fed should do more to support the economy and reduce the high unemployment rate by making another round of big bond purchases, which could help lower long-term rates and bolster growth.
Fed ChairmanBen S. Bernanke, in a news conference Wednesday, didn't close the door to taking such an action. But he said that the Fed policymaking committee considered it "very reckless" to try to reduce unemployment a little faster by taking steps to push up the inflation rate.
Such a move, Bernanke said, could threaten to undermine the credibility of the central bank as a bulwark against inflation.
More broadly, Bernanke defended the Fed against criticism that it's not doing enough to spur the economy, saying, "We are doing a great deal."
The central bank's forecast said that inflation was likely to be slightly higher than previously forecast, reflecting higher oil prices. But most Fed policymakers still expect to hit their inflation target of 2% this year and in the next two years.
Bernanke's comments on inflation, along with Wednesday's policy statement and the new economic projections, suggest that "the bar to additional [bond-buying stimulus] is a little bit higher today than it was before," said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York.
In fact, Rupkey said, the overall message from the Fed made it more likely that the central bank would raise rates before the end of 2014.
The Fed's policy statement, as before, indicated that Europe's debt troubles presented "significant downside risks" to the U.S. economy.
Overall, however, the Fed's assessment of the economy seemed to be slightly more favorable than its statement issued after its mid-March meeting.
For the first time since the recovery from the Great Recession began in 2009, the latest statement said there are "some signs of improvement" in housing, though the sector remains depressed.
And the central bank, while repeating that it expects economic expansion to remain moderate over coming quarters, said the pace of growth should then "pick up gradually." On the other hand, the economic growth rates for 2013 and 2014 were notched down a bit.
The biggest change in the forecast was the projection for near-term unemployment. In January, most Fed policymakers said they expected the rate to land at 8.2% to 8.5% in the fourth quarter; the new forecast lowered that to a range of 7.8% to 8%.
Bernanke cautioned that it was difficult to assess the labor market because of the mild winter weather, which he said appeared to have raised job-growth figures artificially in January and February, while reducing the payroll number in March.
The government said the economy produced 120,000 net jobs in March, about half of the average of each of the preceding three months.
Bernanke also said he couldn't be sure whether some of the recent job gains may have been inflated because of a kind of catch-up by employers who had cut payrolls excessively right after the recession began in December 2007.
On average, he said, the economy would probably need to create roughly 150,000 to 200,000 jobs a month for the unemployment rate to meet the Fed's new forecast.
If the rate continues to edge lower and falls below 8% early in the fourth quarter, it could give a lift to President Obama's reelection efforts.
His Republican critics and likely challenger Mitt Romney have frequently pointed out that the Obama administration had previously stated that unemployment would be held at 8%.