Light At End Of Tunnel? Fed Sees Faster Economic Growth, With Only Modest Inflation

The Federal Reserve has raised its forecast for economic growth, thanks to an improving public health outlook and trillions of dollars in federal spending.

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AILSA CHANG, HOST:

The Federal Reserve is offering a rosier forecast for the U.S. economy. The central bank now says it expects the economy to grow by 6.5% this year. That is a remarkable turnaround after last year's steep drop. Since the Fed's previous forecast, Congress has approved nearly $3 trillion in additional relief spending. And the public health outlook has improved as well, with new coronavirus infections dropping and the pace of vaccinations ramping up. To talk more about all of this, we're joined now by NPR's Scott Horsley.

Hey, Scott.

SCOTT HORSLEY, BYLINE: Good to be with you.

CHANG: Good to be with you. OK, so tell us about this new Fed forecast.

HORSLEY: Well, the Fed says the U.S. is bouncing back from the pandemic recession more quickly than had been expected. That 6.5% growth rate you mentioned would be the fastest since the 1980s. The Fed also expects the unemployment rate to drop to just 4.5% by the end of this year. Now, that headline number does understate the problem a little bit because it doesn't reflect the millions of people who've dropped out of the workforce, but it would still be a huge improvement from the nearly 15% unemployment rate we had last April, and it's a lot better than a lot of people would have expected.

CHANG: Yeah. I mean, this all does sound really encouraging. But how confident does the Fed seem in this outlook?

HORSLEY: Certainly more confident than it was three months ago. When the Fed issued its last forecast, you know, we were in the middle of that winter spike in coronavirus cases. There was still a lot of uncertainty about how much help Congress would provide. Since then, Congress has passed two big relief bills that both included direct cash payments to most Americans, as well as expanding unemployment benefits. So that's giving money - it's giving people more money to spend, and they should also have more opportunities to spend it as COVID restrictions are gradually relaxed around the country and as people just feel more comfortable eating out and traveling and going to concerts, that kind of thing. As rosy as that forecast is, though, Fed Chairman Jerome Powell says there is still a lot of uncertainty, as this is pretty uncharted territory for the central bank.

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JEROME POWELL: The path of the virus continues to be very important. We have these new strains which can be quite virulent. We're clearly on a good path with cases coming down. But we're not done, and I'd hate to see us take our eye off the ball.

HORSLEY: Of course, the Fed itself has also done a lot to support the economic recovery, and Powell promised to keep that up.

CHANG: But I thought - we've been hearing a lot of warnings that all of this extra spending could spark a surge in inflation. So I mean, you know, that's rattled the stock market in recent weeks. What is the Fed saying about all of that?

HORSLEY: They're not too concerned. You know, for years, the Fed's been more worried about inflation that's too low rather than too high. Powell and his colleagues do expect some increase in prices this year as people start to spend money more freely. But Powell says that should be both manageable and temporary.

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POWELL: You can only go out to dinner once per night, but a lot of people can go out to dinner. It's also - wouldn't be surprising if - and you're seeing this now, particularly in the goods economy - there'll be bottlenecks. They won't be able to service all of the demand maybe for a period. And so it'll turn out to be a one-time sort of bulge in prices, but it won't change inflation going forward.

HORSLEY: And investors seemed reassured by that. The Dow closed above 33,000 today for the first time ever.

CHANG: So does this mean the Fed's going to keep interest rates near zero for a lot longer?

HORSLEY: They're certainly promising to keep rates very low for an extended period. There are some Fed officials who say we could see rates go up as early as next year, but most think any rate hike will be 2023 or maybe later.

CHANG: That is NPR's Scott Horsley.

Thank you, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.