Despite some gloomy news the US Federal Reserve (Fed) still expects the US to experience economic growth into the future, albeit at a much reduced level. The Fed also reduced its expectations on the level of inflation over the coming months.

One of the drivers to the reduced growth is the still dampened level of demand for US goods caused by Europe’s economic woes.

The 2010 US growth forecast was reduced from between 3.2 and 3.7% down to a range of between 3 and 3.5%. The 2011 forecast was also changed downwards slightly.

The Fed’s earlier inflation forecast of 1.2 to 1.5% has been revised down to 1 to 1.1% for 2010. The Fed considers a level of 1.7% to 2% to be normal.

The forecast growth reduction has led to fears that unemployment will be higher for a longer period than previously thought. The Fed has increased its projections slightly and expects the jobless level to be 9.2% to 9.5% at the end of 2010 and reduce to 8.3% to 8.7% by the end of 2011.

Although not all good news the Fed obviously still expects there to be some growth. They "generally saw the incoming data and information received from business contacts as consistent with a continued, moderate recovery in economic activity".

Even without strong demand for US goods from Europe the Fed noted that there was increased investment by business on equipment and software. General household spending also remained relatively strong.

Although they saw no immediate cause to change policy at the moment, they did say they would need to keep their options open on supporting economic growth if the recovery falters. This may lead to interest rates staying low for an extended period or even further quantitative easing.

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