Fed Takes Modest Action on Rates as Forecast Dims

by
June 21, 2012
By , The New York Times

WASHINGTON — In a pattern that has become familiar, the Federal Reserve said on Wednesday that the economy was growing more slowly than it had forecast, in part because its efforts to hasten recovery had proved insufficient.

With the economy stumbling into the summer months after the false promise of a relatively strong winter, the Fed announced a modest expansion of its efforts to stimulate growth.

The Fed said its senior officials now expected growth of 1.9 percent to 2.4 percent this year, half a percentage point lower than they forecast in April. They predicted the unemployment rate would not drop below 8 percent this year, and that inflation would not climb above 1.7 percent.

Those are the vital signs of a patient who will be ill for some time. And the Fed noted that the outlook could worsen if events in Europe unnerved financial markets or if politicians in Washington failed to resolve a stalemate over fiscal policy.

The central bank pledged to buy $267 billion in long-term Treasury securities over the next six months as part of a continuing campaign to reduce borrowing costs.

It is the first time since January that the Fed has intensified its efforts to revive economic growth, and the first time since September that it has announced a new round of asset purchases. This is the fifth such announcement since 2008.

But the new program is not large enough to provide significant economic support. Instead it amounts to a placeholder, an effort to soothe markets and preserve the status quo while the Fed seeks greater clarity about the health of the economic recovery.

“We have to get further information about the state of the economy, about where things are going and about what’s happening in Europe,” Ben S. Bernanke, the chairman of the Federal Reserve, said at a news conference after the release of the policy statement and projections.

His comments raised the prospect that the Fed would act again later this year.

“We are prepared to do what is necessary,” he said, in a version of the pledge that has become his byword. “We are prepared to provide support for the economy.”

Investors appeared to respond with disappointment. Major equity indexes fell after the Fed’s policy was announced, rose for a while, and then fell throughout Mr. Bernanke’s 45-minute news conference before staging a late rally to end the day little changed. The Standard & Poor’s 500-stock index fell 0.2 percent.

The Fed is already engaged in broad efforts to reduce borrowing costs for businesses and consumers. It has kept short-term interest rates near zero since late 2008, and is holding more than $2.5 trillion in Treasuries and mortgage-backed securities to hold long-term interest rates down.

But the unemployment rate, after declining rapidly during the final months of 2008, has stalled above 8 percent. More than 20 million Americans could not find full-time work last month, three years after the recession ended.

The Fed’s policy-making committee said Wednesday that while it expected growth would continue at a “moderate pace,” job creation and household spending both slowed in recent months. Mr. Bernanke said the housing depression, domestic fiscal policy and Europe’s downturn were dragging on growth.

To read more, visit: http://www.nytimes.com/2012/06/21/business/economy/fed-extends-program-to-lower-costs-of-borrowing.html?_r=1&pagewanted=all

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