Fed staff sees one U.S. rate hike this year, inflation stuck in low gear

By Jason Lange and Howard Schneider

WASHINGTON (Reuters) - Staff at the Federal Reserve's Board of Governors see a single quarter-point U.S. interest rate increase by year's end, inflation stuck in low gear for five more years and an economy growing more slowly than expected by U.S. policymakers.

Those bearish projections were included in a set of staff forecasts presented to policymakers at their June 16-17 meeting and inadvertently posted on the Fed's website on June 29. (http://bit.ly/1IrnFT8)

The forecasts do not represent the views of the central bankers who set America's interest rate policy. Those policymakers, many based outside of Washington in regional Fed branches, create their own forecasts.

But Board of Governors' staff views are sensitive and influential enough that the Fed normally releases them about five years after they were made.

The disclosure was a result of "procedural errors" at a staff level, a Fed spokeswoman said. The matter has been referred to the Fed Board's Inspector General, the Fed said in a statement. Investigators have been probing the Fed over an alleged leak in 2012 of sensitive information to a private financial newsletter.

The staff expects policymakers will raise their benchmark interest rate, known as the Fed funds rate, enough for it to average 0.35 percent in the fourth quarter of 2015.

That implies one quarter-point hike this year, as the Fed funds rate is currently hovering around 0.13 percent.

The Fed intervenes in markets to keep the rate at target, which it says is between 0 and 0.25 percent. The Fed uses the rate to control the cost of short-term lending between banks.

All but two of the Fed's 17 policymakers expect to raise rates in 2015, according to projections released by the Fed on July 8. Central bankers were divided between raising rates once or twice this year.

The staff views were less optimistic than several other key policymaker forecasts published by the Fed.

In the projections, which stretched from 2015 to 2020, the staff did not expect inflation to ever reach the Fed's 2 percent target. By the fourth quarter of 2020, they saw the PCE inflation index rising 1.94 percent from a year earlier.

The Fed's staff also took a dimmer view of long-run economic growth, expecting gross domestic product to expand 1.74 percent in the year through the fourth quarter of 2020. The views of Fed policymakers for long-term growth range from 1.8 percent to 2.5 percent.

(Reporting by Jason Lange and Howard Schneider; Editing by Chizu Nomiyama, Steve Orlofsky and David Gregorio)