By Richard Johnstone | 20 June 2013

The Federal Reserve has downgraded its growth projection for the US this year by 0.2 percentage points, warning that the economy would expand only at a ‘moderate pace’ in the near term.

Publishing its latest set of economic forecasts, the Fed’s Open Market Committee said it expected growth of 2.3%–2.6% in 2013 compared with the March estimate of up to 2.8%.

However, the projection for 2014 has been increased from a maximum of 3.4% to 3.5%.

The forecast also predicted that US unemployment would remain above 7% for most of the next year, but would fall to around 6.8% by the end of 2014. The rate is currently 7.5%.

In its published analysis, the Fed indicated that, although the unemployment rate would gradually decline, economic growth was going to remain sluggish.

As a result, the Fed would continue its quantitative easing policy by buying $45bn of government debt securities and $40bn of mortgage-backed securities a month.

These measures were intended to make the financial conditions in the economy ‘more accommodative’, and would continue ‘until the outlook for the labour market has improved substantially’.

The committee expects to keep its interest rate, which is currently set at 0.25%, low for ‘for a considerable time after the asset purchase programme ends and the economic recovery strengthens’.

The committee promised that it would take ‘a balanced approach’ when it did decide to reverse its current policy, and this would be ‘consistent’ with its long-term goals of maximum employment and 2% inflation. Inflation currently stands at 1.4%.

Responding to the update, asset manager Schroders said it now expected the Fed would begin to reduce its asset purchases next year.

Chief economist Keith Wade said the programmes were likely to be wound down once the unemployment rate was in the vicinity of 7%.

Although investors should have increased confidence in recovery, the immediate focus would be on the ‘unwinding’ of the asset-purchasing programme, he added.