US central bank cuts growth forecast for 2014

Federal Reserve exterior One big question for Fed watchers is when the central bank will raise its short-term interest rate

The US Federal Reserve has cut its growth forecast for 2014 because of the harsh winter weather.

The central bank is now predicting growth of between 2.1% and 2.3% for this year, down from its March forecast of 2.8% to 3%.

However in its accompanying statement, the bank said that economic activity had "rebounded in recent months".

As expected, it has also trimmed back its stimulus programme by $10bn (£5.9bn) a month to $35bn.

The central bank has been buying bonds to keep long-term interest rates low and encourage banks to lend.

This is the fifth cut in purchases since December and it is expected to stop buying bonds altogether by the autumn.

However the chair of the bank, Janet Yellen, stressed that this was not a pre-set programme and if necessary it would change course.

As far as interest rates go, the bank said they would remain near zero "for a considerable time" after the bond buying ends.

Questioned as to how long that might be, Ms Yellen said there was "no mechanical formula" and that it "depends on how the economy progresses".

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Analysis: Andrew Walker, BBC's economics correspondent

It was another small step in withdrawing the exceptional policies the Fed undertook in the wake of the financial crisis. But it was very clear from Janet Yellen's comments that it will be a long time before the US is truly back to health.

The Fed's main interest rate is currently close to zero and it's likely to stay there for a "considerable time". And when they do start raising it, the Fed's policy makers expect it to be a long wait before it gets back to levels that would be considered normal.

They remain concerned about the residual effects of the financial crisis, which they suggest means the economy's potential to grow may be lower.

So here we are, seven years on from the onset of the crisis, looking at an economy that was actually relatively quick to rebound, and still the lingering after effects will last for years more. So too will the need for treatment in the form of abnormally low interest rates.

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Janet Yellen Fed chair Janet Yellen said there was "no mechanical formula" for when rates would rise.

Currently, most market watchers do not expect them to rise until at least the middle of 2015.

Start Quote

Economic activity will expand at a moderate pace and labour market conditions will continue to improve gradually”

End Quote Ward McCarthy Financial economist

Ward McCarthy, chief financial economist at Jeffries and Fed watcher for 30 years, said:

"It's clear they do not have a specific time frame for rate rises. But there also seems to be a wide range of opinions internally as to how quickly they should normalise rates [once they start rising]."

'Steady as she goes'

Mr Ward thinks interest rates will rise in the second half of 2015.

"Janet Yellen has made clear the condition of the labour market is the top priority and she's still very dissatisfied with it. She wants to buy as much time as possible for people on the fringes of the labour market to get back in."

On inflation, Ms Yellen said she expected it to remain at or below the target of 2% until the end of 2016. Low inflation would enable the bank to keep interest rates low.

The Federal Reserve expects growth to pick up again in 2015, sticking to its prediction of 3% to 3.2% expansion.

"Economic activity will expand at a moderate pace and labour market conditions will continue to improve gradually," the central bank said.

"Household spending appears to be rising moderately and business fixed investment resumed its advance."

Kim Rupert from Action Economics in San Francisco said: "Steady as she goes, with respect to policy. [They] want to make sure the recovery is for real and is in place and are still maintaining a very accommodative posture."

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