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Federal Reserve Sees Slower Growth, but Maintains Plans to Trim Stimulus

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The Federal Reserve chairwoman, Janet L. Yellen, said the Fed would maintain its plan to trim its stimulus campaign by reducing its monthly bond purchases to $35 billion beginning in July.CreditCredit...Susan Walsh/Associated Press

WASHINGTON — The Federal Reserve on Wednesday sharply cut its economic forecast for 2014 even as it said the economy had bounced back after a nasty winter, allowing the central bank, in its view, to continue to retreat from its stimulus campaign.

A mélange of policy documents and public remarks by the Fed’s chairwoman, Janet L. Yellen, carried the message that the Fed expected the recovery to maintain its slow and steady pace, and affirmed that the Fed intended an equally slow and steady retreat from its supporting role.

The Fed announced, as expected, that it would cut monthly bond purchases by $10 billion in July, to $35 billion, and that it still planned to end purchases this fall. It also affirmed that it is likely to start raising its benchmark interest rate next year.

“Growth in economic activity has rebounded in recent months,” the Fed said in a statement after a two-day meeting of its policy-making Federal Open Market Committee. It said labor markets, household spending and business investment were all improving.

There are “many good reasons” to expect faster growth going forward, Ms. Yellen said at a news conference after the statement was released. But she tempered that optimism by noting that Fed officials expect that damage from the recession will continue to weigh on the pace of recovery.

Ms. Yellen said she was particularly concerned that some people who had been unable to find work would be permanently excluded from the job market.

“It is conceivable that there is some permanent damage to them, to their own well-being, to their families’ well-being and to the economy’s potential,” Ms. Yellen said, echoing a concern increasingly prevalent among economic policy makers.

At the same time, Ms. Yellen sought to emphasize that the Fed regarded its forecasts as uncertain and its plans as malleable. Officials are concerned investors have grown too complacent about the trajectory of monetary policy and the economy.

David Wessel, a senior fellow at the Brookings Institution, noted that Ms. Yellen “looked for ways to feather the word ‘uncertainty’ into almost every answer.”

“She ticked off an impressive list of reasons why the U.S. economy should be doing better in the months ahead,” he wrote in an analysis on the Brookings website. “But she knows the Fed has been consistently over-optimistic about economic growth, and she didn’t exude confidence.”

The Fed offered little information about the question most on the minds of investors: What comes next, after the central bank ends its bond-buying campaign later this year?

The aggregated forecasts of Fed officials, published Wednesday, showed a small increase in the average expected level of the Fed’s benchmark interest rate at the end of 2015 and 2016. The median for 2015 rose to 1.2 percent from 1.125 percent, but it was not clear that the change reflected a forward creep in the views of Fed officials about the timing of a first rate increase from the level close to zero at which the Fed has maintained the rate since late 2008. The change is slight, and the documents do not indicate whether it is Ms. Yellen and her allies who changed their views.

Comparisons were also complicated by shifts in the committee’s membership, as two members left and two new arrivals submitted forecasts for the first time.

Twelve of the 16 participants said they expected a first rate increase in 2015. Investors generally share that expectation, but Ms. Yellen, who appeared to affirm that timing at her last news conference, avoided a repeat on Wednesday. Asked about the meaning of the Fed’s statement that it would raise interest rates “a considerable time” after it stops buying bonds, she said the timing depended on the path the economy follows in the months ahead.

“While the Fed chair has tried to downplay those projections, they are consistent with Fed officials generally becoming at least a bit less dovish as unemployment continues to decline,” Jim O’Sullivan, chief United States economist at High Frequency Economics, wrote in a note to clients.

Other analysts saw less meaning in the movement, however, and markets continue to price in a somewhat later and slower increase in rates.

“The dots are likely biased upward by the more ‘hawkish’ members of the F.O.M.C., with the consensus likely more dovish,” Michael Dolega, senior economist at TD Bank Group, wrote in a note to clients.

The Fed was more forthcoming about its economic views. Officials estimated that the economy would expand 2.1 percent to 2.3 percent this year, down from a March forecast for growth of 2.8 percent to 3.0 percent. It is the seventh straight year that the optimism of the Fed’s initial forecasts has been gradually eroded by disappointing data.

They also estimated that the economy in the long term would grow at a rate of 2.1 percent to 2.3 percent, markedly below their expectations just a few years ago. They continued to predict, however, that growth in 2015 and 2016 would exceed that average, topping 3 percent for the first time since the recession.

Most Fed officials remained sanguine about inflation, making only small changes to their predictions that inflation will remain at or below 2 percent through 2016.

Ms. Yellen also said concerns about financial stability were not playing a major role in the timing of the retreat. “I don’t see the kinds of broad trends that would suggest to me that the level of financial stability risks has risen above a moderate level,” she said.

Some economists share the Fed’s guarded optimism. James W. Paulsen, chief investment strategist at Wells Capital Management, said he saw signs of gathering momentum, including increased lending by banks and borrowing by consumers.

“The real stimulus comes when the free market starts to stimulate, and that is happening now,” Mr. Paulsen said. He worries, however, that the Fed is underestimating the potential for faster inflation, a concern also shared by some Fed officials, who have continued to press for the Fed to accelerate the pacing of its retreat.

The Fed’s board held an unannounced meeting Tuesday, before the full policy-making committee convened, to discuss “medium-term monetary policy issues.” The board, which comprises the governors based in Washington, but not the presidents of the regional reserve banks, held a similar meeting in April. The meetings are a reflection of Ms. Yellen’s deliberative leadership style, the complexity of the internal debate — and perhaps the need to bring new officials up to speed.

The policy-making committee has added three new voters since its last meeting in April. The Senate confirmed Stanley Fischer as the Fed’s vice chairman and Lael Brainard as a new member of the board; Both were sworn into office on Monday. Loretta J. Mester, the new president of the Federal Reserve Bank of Cleveland, also attended her first meeting and exercised the vote Cleveland holds this year.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Growth Lets Fed Maintain Policy Course. Order Reprints | Today’s Paper | Subscribe

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