Fed cuts growth forecast; no hint of more support

WASHINGTON Wed Jun 22, 2011 7:44pm EDT

Chairman of the Federal Reserve Ben Bernanke holds a press briefing in Washington, June 22, 2011. REUTERS/Kevin Lamarque

Chairman of the Federal Reserve Ben Bernanke holds a press briefing in Washington, June 22, 2011.

Credit: Reuters/Kevin Lamarque

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WASHINGTON (Reuters) - The Federal Reserve on Wednesday cut its forecasts for U.S. economic growth, but offered no hint of further monetary support, saying the recovery should gradually pick up heading into 2012.

Fed Chairman Ben Bernanke said factors weighing on the economy, such as high commodity prices, should be fleeting but warned some of the weakness could linger.

"Part of the slowdown is temporary and part of it may be longer lasting," Bernanke told a news conference after a two-day Fed policy meeting.

The U.S. central bank kept official interest rates at a historic low near zero and Bernanke signaled they will stay there through the end of the year or longer.

The Fed estimated the economy should grow 2.7 percent to 2.9 percent this year, down from a forecast range of 3.1 to 3.3 percent made in April.

It also said it sees 2012 growth in a range of 3.3 percent to 3.7 percent, lower than its previous forecast.

In a statement, the central bank said a jump in commodity prices and supply-chain disruptions from Japan's devastating earthquake had weighed on growth and pushed up prices, but that those factors should dissipate over time.

"The Fed knows it is in for a rough road ahead," said Steve Blitz, senior economist at ITG Investment Research in New York. "At this moment the Fed is just like the rest of us, on the sidelines waiting to see what unfolds."

The Fed confirmed it was ending its $600 billion bond-buying program at the end of June and reiterated it will continue to reinvest principal payments from its holdings.

By the time its latest "quantitative easing" program wraps up next week, the Fed will have pumped some $2.3 trillion into the economy.

The Fed's downbeat economic assessment weighed on stocks, which closed lower after four days of gains. Prices for U.S. government bonds were nearly flat and the dollar edged up against the euro.

"There are no hints of further easing from the Fed," said Nick Bennenbroek, head of Group of 20 forex strategy at Wells Fargo in New York. "The statement overall disappointed investors looking for more bearish language and that's why we are seeing the dollar rally a little bit."

Bernanke, in a wide-ranging question-and-answer session with reporters which touched on issues as diverse as Greece's economic woes and the size of reserves that big banks should hold, conceded that U.S. economic hopes were partly hostage to events in Europe.

"If there were a failure to resolve that (Greek debt) situation, it would pose threats to the European financial system, the global financial system, and to European political unity," he said. "So yes, we did discuss it and it is one of several potential financial risks that we are facing now."

LONG CRAWL BACK

Two years after the end of the U.S. recession, the recovery looks disappointingly weak. Employers have been reluctant to hire and the jobless rate rose to 9.1 percent in May.

The Fed on Wednesday downgraded its view of the labor market and pushed its forecast for unemployment a bit higher.

It said the jobless rate would likely average 8.6 percent to 8.9 percent in the fourth quarter of 2011. In April, it had forecast a range of 8.4 to 8.7 percent. By 2013, the Fed said joblessness would still be significantly above what it considers to be consistent with full employment.

The Fed's inflation forecast was little changed at 2.3 percent to 2.5 percent for this year, but its projection of core prices, which strips out food and energy costs, moved up to a 1.5-to-1.8-percent range from 1.3 to 1.6 percent.

Policymakers at the Fed strive to keep inflation in a 1.7-to-2-percent range and the acceleration in core prices could complicate any desire to further support the economy.

In its statement, the Fed dropped any reference to core inflation, which it characterized in April as being "somewhat low."

With the jobs outlook uncertain and home values falling, consumer spending -- which makes up around 70 percent of U.S. GDP -- has lagged. Factory activity has been sluggish as well.

The economy grew at just a 1.8 percent annualized rate in the first three months of the year. Analysts expect growth of around 2 percent in the second quarter, still not sufficient to generate a big uptick in hiring.

The economy's weakness has led to some speculation the Fed could take fresh steps to bolster the recovery.

While Bernanke did not rule anything out, he made clear the Fed does not feel the economy is in as dire a condition as it was last fall when it launched its latest bond-buying plan.

If it were pressed into action, the Fed chief said the central bank could buy more securities, lower the interest rate it pays to banks on reserves held at the Fed or even pledge to keep its balance sheet at a high level for an extended period.

Bernanke said the vow to keep interest rates exceptionally low is intended to suggest the Fed is at least two or three meetings away from a move, but that the time period could be "significantly longer" depending on the economy.

The Fed statement and press conference led more large bond firms put off expectations of rate hikes until the second half of next year.

In a Reuters poll, only five of 19 primary dealers in Treasury securities said they expect the Fed to raise rates in the first half of 2012, down from six out of 18 in a June 3 poll. (Editing by Andrea Ricci, Tim Ahmann, Diane Craft and Gary Crosse)

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Comments (27)
Why does the Fed ignore half of it’s mandate? The “full employment” part?

Jun 22, 2011 10:13am EDT  --  Report as abuse
FlBob wrote:
I hope Bernanke gives a clear explanation for why the Fed still expects an apparently fairly strong rebound in the second half of this year. Recent reports and trends seem to me to show little evidence for that, and it also appears unlikely that any major new stimulus will come from the Federal Reserve or US government. Maybe the Fed will be proven correct, but their forecast accuracy for the first half of the year has certainly not been encouraging.

Jun 22, 2011 12:05pm EDT  --  Report as abuse
AmirDewani wrote:
Politics and economics won’t go together under the existing circumstances.The public representatives must do some soul searching.They are completely ignoring the European debt scenario.
The banks won’t finance small business citing the risk factors.Agriculture needs equipments, seeds,fertilizers, credit and more.Similar are the needs to be met to promote manufacturing. Export orientation lessons are no more there in our books.The big corporations prefer to invest hugely in their ventures outside because of the attractive facilities in hiding or evading taxes.Slowly America is drifting towards more of the economic woes. Their number one priority should be reforming fiscal and banking policy which could provide job opportunities and more revenues for the government.
These representatives must know that growth and only growth is the answer to the rising budget deficits and sovereign debts.Instead they are most adamantly focusing on mere benefit cuts.They are most interested in getting reelected, not in solving the problems.And the lobbies are providing them funding for the purpose.That’s why I say politics and economics do not go together.They must read what the IMF and the World Bank are saying about our economy plus the rising commodity prices likely to hit our citizens hard.The fifty states of united America are almost broke. Check it.people are losing jobs and small businesses and they are also focusing on ‘cuts’ and ‘cuts’.Hope they must be doing some brain-storming before the chattering train wrecks.

Jun 22, 2011 1:04pm EDT  --  Report as abuse
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