Home / Markets / Stock Markets /  Is the Fed just seeing shadows—or should we really be worried?

The economy is in better shape than the Federal Reserve thought it would be. Its policy makers aren’t celebrating.

At the conclusion of their two-day meeting on Wednesday, they left rates near zero and indicated that they expect them to remain there through 2023. New economic projections showed how much the outlook has improved since rate-setters last offered up a forecast in June. Their median estimate now calls for gross domestic product to be 3.7% below its year-earlier level in the fourth quarter as opposed to 6.5% lower. And they now see the unemployment rate averaging 7.6% in the fourth quarter, rather than 9.3%.

But in their postmeeting statement, they emphasized that the economy remains much worse off than it was at the start of the year. And they wrote that they will “aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time"—a change that, while keeping with recent adjustments to the Fed’s policy framework, most economists didn’t expect to be reflected in their official statement until later this year.

The dour take on the economy and the dovish shift in the statement might reflect the likelihood that, from here on out, gains in the economy will be harder-fought than in the late spring and early summer and that there remains a risk of the economy slumping anew.

Consider the August retail sales report that the Commerce Department released Wednesday. This showed that spending at service stations, stores, restaurants and online rose a seasonally adjusted 0.6% in August from a month earlier, which was a bit shy of what economists expected and showed that the big rebound in spending has begun to fade.

That could merely be an indication that spending gains have shifted to a lower trajectory. The big bounces in May and June hardly seemed sustainable. Or it could mean that the expiration of $600 a week in additional unemployment benefits in July—a loss only partially compensated for by President Trump allowing states to use disaster-relief funds to give unemployed workers an additional $300 a week in benefits—is starting to constrain spending.

The Fed is worried about the latter, with Fed Chairman Jerome Powell saying in his postmeeting press conference that more fiscal support is probably needed. At this point, it doesn’t look as if that support will be forthcoming, with Senate Republicans sticking with their plans for a “skinny" stimulus plan and House Democrats agitating for more.

The danger is that, for all its dovishness, what the economy does next is out of the Fed’s hands.

Write to Justin Lahart at justin.lahart@wsj.com

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