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Federal Reserve sharply cuts forecast for US economic growth and sees little sign of inflation

WASHINGTON - The Federal Reserve has sharply cut its forecast for U.S. growth this year, reflecting a shrinking economy last quarter caused mostly by harsh weather.

At the same time, the Fed has barely increased its estimate of inflation despite signs that consumer price increases are picking up. Its benign inflation outlook suggests that the Fed doesn't feel rising pressure to raise short-term interest rates.

The Fed updated its economic forecasts Wednesday after a two-day policy meeting.

It expects growth to be just 2.1 per cent to 2.3 per cent this year, down from 2.8 per cent to 3 per cent in its last projections in March. It thinks inflation will be a slight 1.5 per cent to 1.7 per cent by year's end, near its earlier estimate.

Still, more Fed members than in March expect the central bank's short-term rate to be 1 per cent or higher by the end of 2015. That points to the prospect of more members advocating higher interest rates next year. Fed policymakers' average forecast for short-term rates in 2016 also edged up.

But Fed members think short-term rates will be lower in the long run than they did three months ago. That may reflect Chair Janet Yellen's view that rates will remain at historically low levels even after the unemployment rate falls back to its longer-term average because the economy may remain weak.

The Fed releases its economic projections four times each year. The forecasts serve as guides for its interest rate decisions.

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