Posted on Wed, Nov. 02, 2011
last updated: March 15, 2013 11:57:46 AM
WASHINGTON — For the third time this year, the Federal Reserve on Wednesday scaled back its economic growth forecasts for the next two years, projecting a slower economy and higher unemployment than it did back in June.
In a news conference after the two-day meeting of the Fed's interest rate-setting committee, where the Fed left its benchmark rate unchanged at near zero, Chairman Ben Bernanke said the forecast was for economic growth in 2012 at an annualized rate of 2.5 percent to 2.9 percent. That's down from projections in June of 3.3 percent to 3.7 percent.
Similarly, June's forecast for the unemployment rate in 2012, a presidential election year, was 7.8 percent to 8.2 percent. On Wednesday, Bernanke and colleagues offered a revised forecast that puts the central tendency — which excludes the highest and lowest projections — between 8.5 percent and 8.7 percent. That's close to today's rate of 9.1 percent.
"The pace of progress is likely to be frustratingly slow," Bernanke said in opening remarks for his third news conference this year.
He acknowledged that the Fed's been too optimistic this year.
"We did underestimate the pace of recovery for some fundamental reasons," he said, noting that he and his fellow Fed economists misjudged how long it would take for financial-sector repair after the near-collapse of 2008.
Bernanke also cited problems in the housing market that were deeper than first thought and Americans paying down debts instead of spending as other reasons for misjudging the pace of recovery.
In addition, he said, "There has been a certain amount of bad luck." He noted that Japan's earthquake and tsunami hurt global trade, and a spike in oil prices hurt consumers. Now there's the debt crisis in Europe and the potential for another downgrade in America's credit rating should U.S. lawmakers fail to find compromise on a deficit-reduction plan later this month.
It's all hurt consumer confidence and business sentiment.
"You can see right now it is where it was in the depths of the recession. That's very discouraging," Bernanke said.
He said the period of June to September had seen growth better than expected but not enough to change the Fed's medium-term projections. The Fed still sees the jobless rate at year's end staying about where it is right now.
Bernanke repeated that he stands ready to purchase Treasury bonds or mortgage bonds more aggressively if needed to stimulate the economy, a process known as quantitative easing. A decision on doing this depends on the degree to which the Fed has inflation under control and whether employment levels are ticking up, down or treading water.
The reason Bernanke began holding news conferences — a first for a Fed chairman — is to provide clarity about Fed policy. But when it came to how and when the Fed might take more aggressive steps to stimulate the economy, he was clear as mud Wednesday.
"I don't think I can be as precise as you'd like," he said.
The decision will come, he said, when Fed governors feel "we are falling sufficiently short of our objectives ... and that we believe that monetary stimulus would be beneficial. Then the committee would try to take correction action."
Action by the Federal Open Market Committee doesn't seem imminent, not with the 2.5 percent annualized growth rate in the third quarter this year and prices rising.
"With ... growth around 2.5 percent and core inflation currently above the Fed's 'target,' we believe the FOMC will wait and monitor the fourth-quarter data before making any move in early 2012," John Silvia, the chief economist for Wells Fargo Securities in Charlotte, N.C., wrote in a research note.
Wall Street traders, who parse Bernanke's words as sacred code and favor stimulus since it boosts stock prices, could pin their hopes on one other Bernanke statement:
"The outlook remains unsatisfactory over the next few years, and we will continue to ask ourselves if additional stimulus or actions can provide a better outcome."
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