Fed acknowledges economy is growing more slowly
Thursday, June 23, 2011
WASHINGTON (AP) — The Federal Reserve acknowledged Wednesday that the economy is growing more slowly than it expected. But it said it will complete its $600 billion Treasury bond buying program by June 30 as planned and announced no further efforts to boost the economy.
Ending a two-day meeting, the Fed repeated a pledge to keep interest rates at record lows near zero for “an extended period,” a promise it’s made for more than two years.
Fed officials said in a statement that they think the main causes of the economy’s slowdown, such as high gas prices and supply disruptions from Japan’s disasters, are temporary. Once those problems subside, Fed officials said the economy should rebound.
But at a news conference after the statement was released, Federal Reserve Chairman Ben Bernanke acknowledged that some of the problems slowing the economy could persist into next year.
“Maybe some of the headwinds that are concerning us, like weakness in the financial sector, problems in the housing sector ... some of these headwinds may be stronger and more persistent that we thought,” Bernanke said. He was responding to a question about whether more permanent factors had led to the dimmer outlook.
Stocks, which had been mixed most of the day, began to slide around 2:30 p.m. That was when Bernanke acknowledged that some of the problems affecting the economy may go beyond temporary factors.
The Dow Jones industrial average closed down 80 points for the day. All of losses occurred in the final 90 minutes of trading.
The Fed also offered its latest forecast for the economy Wednesday. It predicts the economy will grow between 2.7 percent and 2.9 percent this year. That’s down from its April estimate of between 3.1 percent and 3.3 percent.
Growth at the rate the Fed is projecting won’t be enough to significantly lower unemployment, now at 9.1 percent. The Fed estimates that unemployment will still be around 8.6 percent to 8.9 percent by the end of the year.
Unemployment near 9 percent — less than a year before the 2012 election — would dampen President Barack Obama’s re-election hopes. An Associated Press-GfK poll released Wednesday said nearly 60 percent of Americans disapproved of his handling of the economy in general and unemployment in particular. It’s the worst such reading for Obama since he took office.
The Fed’s statement and updated forecasts stood in contrast to its more upbeat view when officials last met eight weeks ago. At that time, the central bank said the job market was gradually improving.
The new statement acknowledged the slowdown that’s occurred over the past two months. The economy added just 54,000 jobs in May, far fewer than in the previous two months. Consumer spending has weakened, too.
Americans are The Fed said it would keep its holdings of Treasury bonds at current levels. That policy is intended to keep consumer and business loan rates at low levels to stimulate spending.
Though the central bank noted that inflation has risen, it expects those pressures to be temporary as well.
Bernanke and his colleagues are trying to keep a fragile economy on track two years after the Great Recession officially ended. A spike in gasoline prices earlier this year made consumers and businesses more cautious about spending. Consumer spending drives about 70 percent of the economy.
The economy grew at an annual rate of only 1.8 percent in the first three months of the year. It isn’t expected to be much higher in the current quarter.
Beyond high gas prices and supply disruptions caused by the earthquake and tsunami in Japan, the Fed is now facing a new problem: renewed jitters that a debt crisis in Greece could spread to other heavily indebted European nations and send shockwaves through global financial markets.
The Fed has kept rates at ultra-low levels since December 2008. Once the Fed decides to abandon the “extended period” language, it would be viewed as a signal that it is getting ready to reverse course and start boosting interest rates. Many private economists think it will be another full year before the economy has recovered enough for the Fed to actually start raising interest rates.
The Fed is also winding down its Treasury bond-buying program. Supporters say the bond purchases have worked, in part by keeping rates low and encouraging spending. Low long-term rates are vital for consumers buying homes and cars and for companies making investments.
They also argue that those lower rates fueled a stock rally. When Bernanke outlined plans for the bond-buying program in late August, the Standard & Poor’s 500 index was down 6 percent for the year. Eight months later, the S&P 500 was up 28 percent. Lower rates made stocks more attractive to investors than bonds, whose yields were falling.
Falling bond yields have also helped keep mortgage rates near record lows. The average rate on a 30-year mortgage has stayed below 5 percent for all but two weeks this year and was 4.5 percent last week. Still, low rates have done little to boost home sales, which fell in May to the lowest level since November.
Critics, including some Fed officials, saw things differently. They warned that by pumping so much money into the economy, the Fed increased the risks of high inflation later.
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