July 22, 2024

As Economy Slowly Recovers, Fed Says It Has Done Enough

The nation’s central bank said Wednesday that it would complete the planned purchase of $600 billion in Treasury securities next week as scheduled, then pause its three-year-old economic rescue campaign, leaving in place existing aid programs but doing nothing more, for now, to bolster growth.

At the same time, the Fed said that the economy is expanding less quickly than it had expected. It now projects a growth rate of 2.7 percent to 2.9 percent in 2011, and 3.3 percent to 3.7 percent in 2012. Both projections are considerably below the Fed’s April forecast.

“We don’t have a precise read on why this slower pace of growth is persisting,” Ben S. Bernanke, the Fed’s chairman, said at a press conference Wednesday. “Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”

The Fed’s policy board, the Federal Open Market Committee, voted unanimously to maintain its two-year-old commitment to hold a benchmark interest rate near zero “for an extended period.” Mr. Bernanke said the language means that the Fed will not raise interest rates for “at least two or three meetings,” pushing back to November the earliest moment rates could increase. Close watchers of the Fed consider it likely that the central bank will hold interest rates near zero well into next year.

“The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected,” the Fed said in a statement. “The committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline.”

The board also voted to maintain the Federal Reserve’s portfolio of more than $2 trillion in Treasuries and mortgage-backed securities by reinvesting any principal payments in new securities. The investments are intended to hold down long-term interest rates, allowing corporations and consumers to borrow money more cheaply. Studies show that the effort has produced only modest benefits.

Roughly 25 million Americans cannot find full-time jobs, and employers cut back on hiring in May. The Fed said it now projects that the unemployment rate will stand at 8.6 percent to 8.9 percent at the end of 2011, down slightly from the current rate of 9.1 percent. The Fed projected that unemployment will stand between 7.8 percent and 8.2 percent at the end of 2012.

“Recent labor market indicators have been weaker than anticipated,” the Federal Reserve said.

The statement offered hope that the pace of growth would increase, noting that many factors restraining the economy are likely to be temporary, including the impact of higher energy prices and the disruptions to manufacturing caused by the Japanese earthquake. Automakers already are planning sharp increases in production to compensate for the lost volume.

The board remains sanguine about the prospect that price increases will threaten growth. The Fed aims to keep price increases at a steady rate of about 2 percent a year. The price of energy and other commodities spiked earlier this year, but the increases have begun to recede. Moreover, the price of long-term investments continues to reflect little concern about inflation.

“Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable,” the statement said.

This article has been revised to reflect the following correction:

Correction: June 22, 2011

An earlier version of this article understated the size of the Federal Reserve’s portfolio of Treasury bonds and mortgage-backed securities. It is more than $2 trillion, not $2 billion.

Article source: http://feeds.nytimes.com/click.phdo?i=fb94a2f71eef7aea6a8459bc37977d7d

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