Yellen dismisses inflation worries

Meanwhile, Fed cuts economic growth forecast but predicts lower jobless rate.

The Federal Reserve sent a clear message Wednesday: The economy and inflation may be heating up, but the central bank isn’t close to cooling them off.

Despite sharply reducing its 2014 growth forecast due to a first quarter hampered by harsh weather, the Fed said the economy is rebounding, and policymakers agreed to continue to taper bond purchases aimed at holding down long-term interest rates.

But it isn’t expected to raise short-term interest rates sooner than mid-2015 despite the pickup in inflation and faster-than-expected drop in unemployment.

Financial markets cheered. The Standard & Poor’s 500 index jumped 0.8% to reach a record close at 1956.98.

“Broadly speaking, inflation is evolving in line with expectations.” Fed Chair Janet Yellen

Fed policymakers predict the 6.3% jobless rate will decline to about 6% by year’s end, below the 6.2% they forecast in March.

Fed Chair Janet Yellen said the improving unemployment rate doesn’t reflect the many discouraged job-seekers who have stopped working or looking for jobs. They eventually could surge back into the labor force, causing unemployment to fall more slowly.

They make up “a kind of shadow unemployment,” she said.

Similarly, Fed policymakers estimate inflation will be 1.5% to 1.6% this year, vs. their previous forecast of 1.4% to 1.6%. One measure of inflation out this week increased at its fastest pace in more than a year, and another that the Fed more closely watches could have hit its 2% annual target in May.

But Yellen downplayed monthto-month movements in consumer prices. “I think the data we’re seeing are noisy,” she said. “Broadly speaking, inflation is evolving in line with current expectations.”

Several economists disagree. “We believe that a bigger pickup in inflation will eventually prompt the Fed to raise rates more aggressively,” says Paul Ashworth of Capital Economics.

Policymakers acknowledged the rise in inflation and drop in unemployment.

Their median forecast is the Fed’s benchmark interest rate will be 2.5% by the end of 2016, up from the 2.25% March forecast. It’s been near zero since the 2008 financial crisis.