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Federal
Reserve Lowers Economic
Outlook for Rest of Year
Published June 22, 2011
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.
Still,
the statement stood in contrast
to the Fed’s 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.
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.
The
Fed announcement had little effect
on the stock and bond markets. The Dow Jones industrial average was
down
slightly before and after the Fed issued its statement at mid-day.
“The
markets got exactly what they had
been expecting,” said Sung Won Sohn, an economics professor at the
Martin Smith
School of Business at California State University. “The fact that we
did not
have any surprises is comforting.”
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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