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Fed Says Expansion Should Continue at Brisk Pace in 2004
Wednesday February 11, 11:14 am ET
By Rebecca Christie
WASHINGTON -- The Federal Reserve Board predicted Wednesday that the U.S. economy will grow at a brisk pace in 2004 amid tame inflation, in a new forecast that calls for higher growth than the Fed expected last July.
In its semiannual report to Congress, the central bank said its "central tendency" forecast calls for the U.S. economy to grow between 4.5% to 5%, as measured by gross domestic product. The projection is based on growth between the fourth quarter of 2003 and 2004.
This compares with a previous forecast calling for the economy to grow between 3.75% and 4.75% for the year. The Fed issued its initial forecast for the year in a report to Congress last July.
"Federal Reserve policy makers expect that the economic expansion will continue at a brisk pace in 2004," the Fed report said.
The economy should continue to benefit from accommodative monetary policy, recent rises in household net worth, and favorable financial conditions for businesses. Also, the report said that the lower exchange value of the dollar should boost demand for U.S. production, given more sustained economic expansion among U.S. trading partners.
Despite these factors, the Fed said some key aspects of the economic outlook remain unclear.
"Considerable uncertainty, of course, still attends the economic outlook despite these generally favorable fundamentals," the Fed report said.
"In particular, questions remain as to how willing businesses will be to spend and hire and how durable will be the pickup in economic growth among our trading partners," the report said.
The U.S. economy grew 3.1% last year, according to initial data from the Commerce Department. This was slightly higher than the 2.5% to 2.75% range in the Fed's July forecast.
In the third quarter of 2003, U.S. GDP posted a blistering 8.2% growth rate, followed by slower growth of 4% in the fourth quarter. The Commerce Department's Jan. 30 GDP report said solid contributions from personal consumption, exports, equipment and software, inventory investment and residential investment supported growth in the last quarter of the year.
On the inflation front, the Fed noted that the price index for personal consumption -- which the Fed cites as its inflation measure -- was 1.4% over the four quarters of 2003. The Fed said it expects inflation to remain tame over the course of 2004.
"With rapid increases in productivity likely to be sustained and inflation expectations stable, Federal Reserve policy makers anticipate that inflation will remain quite low this year," the report said.
In the Fed's new forecast, the PCE index for personal consumption expenditures is estimated to range from 1% to 1.25% this year. In July, the Fed's estimate of 2004 inflation was a range of 1% to 1.5%.
The Fed said the unemployment rate -- at 5.6% in January -- may edge down over the course of the year. However, the new forecast does not call for a big drop in the jobless rate from current levels.
The Fed's new forecast calls for the unemployment rate to range between 5.25% and 5.5% in the fourth quarter of this year. In July, the Fed said the unemployment rate was expected to range between 5.5% and 6% for 2004.
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