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Fed likely to boost forecasts as stimulus funds flood in

Heather SCOTT
·3-min read

The Federal Reserve opened its two-day policy meeting on Tuesday and is expected to provide a more upbeat outlook for the US economy, which will soon be awash in $1.9 trillion in stimulus funds.

The extra spending is exactly what Fed Chair Jerome Powell had been urging for months to help repair the damage wrought by the coronavirus pandemic, while also pledging to keep interest rates near zero and continue the bank's massive monthly bond buying program.

Despite fears in markets that the battered US economy will roar back and ignite an inflationary spiral, Powell's commitment to keeping his foot on the gas got a boost from data released Tuesday showing retail sales and industrial production dropped sharply in February -- albeit in large part due to winter storms.

The central bank's policy-setting Federal Open Market Committee (FOMC) is not expected to raise its benchmark lending rate when it wraps up Wednesday, but may boost its growth forecasts and perhaps pull forward its prediction for when the Fed will lift rates.

The most-recent FOMC projections released in December showed no rate increase was expected until after 2023, while members gave a median estimate of GDP expanding 4.2 percent this year and 3.2 percent in 2022.

But that was before Congress approved a $900 billion relief bill in the final weeks of December, and before President Joe Biden last week signed his $1.9 trillion rescue package that includes a host of measures including stimulus checks and a continuation of emergency unemployment aid.

"There's no doubt that's going to be revised up," Kathy Bostjancic of Oxford Economics said of the Fed forecasts. "Same with inflation."

She forecasts growth will accelerate to seven percent this year as the economy is "turbocharged" by government spending.

That has fueled concerns about inflation, since she said many economists thought Congress would reduce the size of Biden's initial relief proposal.

- Inflation on the horizon? -

Stock markets have been on a roller-coaster ride for weeks as rising government bond yields raised concerns that the strengthening economy would fuel price increases, which would then force the Fed to renege on its promise of keeping easy money policies in place.

The FOMC's median forecast in December was for inflation to hit 1.8 percent this year, but that is likely to be increased.

Powell has acknowledged that prices are likely to jump as businesses reopen and activity gains traction, but he said those increases are likely to be "transitory."

And he has repeatedly said the central bank will not withdraw stimulus until the economy had returned to maximum employment -- which is unlikely this year -- and inflation was both above its 2.0 percent goal and on track to remain there "for some time."

Data for now are showing few signs of those increases, and, on the contrary, showed the pandemic's damage continuing into last month.

Retail sales plunged three percent compared to January while factory output fell 2.2 percent, according to two separate reports, although both attributed a large part of the decline to the severe and unusual winter storm that froze Texas for days.

Industrial production remains 4.2 percent below February 2020, but retail sales are 6.3 percent higher than a year ago and set to accelerate.

"The consumer is back with lots of support, despite a setback in February," said Diane Swonk of Grant Thornton.

hs/cs