WASHINGTON – Federal Reserve officials expect to raise short-term interest rates a bit faster in 2015 and 2016 than previously forecast and the central bank voted on Wednesday to reduce its bond-buying stimulus program again by $10 billion to $35 billion a month. The Fed now sees the key fed funds rate closer to 1.25% at the end of 2015, up from a prior forecast of 1%, according to a "dot plot." The Fed also expects the rate to move up to around 2.5% by the end of 2016 instead of 2.25% as previously projected. The reason for the change: the central bank still thinks the economy will expand rapidly in the next two years. The economy is seen growing at a 3% to 3.2% range in 2015 and 2.5% to 3% in 2006, unchanged from the bank's prior forecast. While the Fed slashed its growth projection for this year to a 2.1% to 2.3% range - down from 2.8% to 3% - officials clearly believe a harsh winter is to blame and they don't think the contraction in GDP in the first quarter will have a lasting effect. "Growth in economic activity has rebounded in recent months," the Fed said in a statement. Stronger growth will lower the unemployment rate a little faster to as low as 6% by the end of 2014; as low as 5.4% by 2015; and as low as 5.1% by 2016. The Fed barely altered its already-low forecast for inflation as measured by the PCE index. Meanwhile, the central bank as expected voted to cut its bond-buying to $35 billion a month from $45 billion, starting on July 1. The vote was 10-0.
Copyright © 2014 MarketWatch, Inc.