The Fed expects strong job growth to drive the unemployment rate – now 5.5% and close to the Fed's long-run goal—to 5% to 5.2% by year-end, below its previous forecast of 5.2% to 5.3%. The rate, it predicts, will fall to 4.9% to 5.1% by the end of 2016, vs. its previous estimate of 5% to 5.2%.
Fed policymakers are struggling to respond to the unusual crosscurrents of a surging labor market and anemic inflation. The economy added more than 3 million jobs in 2014 and 295,000 last month, pushing down the unemployment rate to a near-normal 5.5% from 10% in 2009.
Falling unemployment typically drives up wages and prices as employers compete for fewer workers. But low oil prices and a strong dollar that makes imports cheap for US consumers have held inflation well below the Fed's target, with its preferred measure at just 0.2% in January. That leaves the economy vulnerable to tremors that could nudge it into deflation, or falling wages and prices that can portend a recession. Yellen has said she believes the meager inflation is "transitory," with oil and gasoline prices expected to rise this year and the dollar likely to appreciate more slowly in coming months. Still, Goldman Sachs expects "core" inflation, which excludes food and energy costs, to fall further by mid-year, delaying a rate increase until September.
And while many economists expect average wage growth to pick up this year from its sluggish 2% pace, it's unclear how quickly that will happen. Businesses can still draw from an ample supply of discouraged workers who have stopped looking for jobs and part-timers who prefer full-time positions, allowing them to raise pay cautiously.
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