The New York Times
By: Binyamin Appelbaum
June 22, 2011
WASHINGTON -- And at the end of June, the Federal Reserve finished its work and rested.
The nation's central bank said Wednesday that it would complete the planned purchase of $600 billion in Treasury securities next week, 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 the economy was expanding less quickly than it had predicted. 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 estimates are markedly below its last forecast in April.
As growth has sputtered this year, economists have pointed to higher oil prices, the Japanese earthquake, bad weather, a lack of confidence. The unifying theme was that spending and investment would surge as these temporary impediments subsided. The Fed's latest forecast, however, reflects the surprising weight of deeper and more intractable problems, including unsustainable public and private debts, the wreckage of the housing market and trade imbalances.
Roughly 25 million Americans were unable to find full-time work in May, and the central bank projects that most of those people will remain unemployed for years to come.
"We don't have a precise read on why this slower pace of growth is persisting," the Fed chairman, Ben S. Bernanke, said Wednesday at a news conference. "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 markets had been up for much of the day but began falling after the news conference started. The Dow Jones industrial average, which was as high as 12,207.99 in the morning, turned sharply lower after 2:30 p.m., ending the day down 80.34 points at 12,109.67.
Mr. Bernanke dismissed for now any possibility that the Fed would extend its efforts to stimulate growth, saying that the economy was moving in the right direction. The slow pace of the recovery justified the Fed in continuing its existing efforts, he said, but not more.
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 meant it would not raise interest rates for "at least two or three meetings," pushing back to November the earliest moment rates could rise. Economists consider it likely that the central bank will hold interest rates near zero well into next year.
The board also voted to maintain the Fed's portfolio of more than $2 trillion in Treasuries and mortgage-backed securities by reinvesting principal payments. The board did not indicate how long this policy would continue, a decision that Mr. Bernanke described as intentional. Fed officials have said that allowing the portfolio to dwindle is likely to be the first step when the central bank decides to begin the withdrawal of its aid programs.
"The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected. Also, recent labor market indicators have been weaker than anticipated," the Fed said before Mr. Bernanke's news conference. "However, the committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline."
Automakers, for example, already are planning sharp increases in production to compensate for the disruptions caused by the Japanese earthquake. Prices for new and used cars have climbed sharply in recent months, suggesting that there is considerable pent-up demand.
The Fed has undertaken a series of unprecedented programs since 2008 to arrest the financial crisis and to revive the economy. The central bank first paused its efforts in the spring of 2010, as the economy appeared to be finding its own momentum, only to begin a new round of aid later in the year, as those signs of progress proved to be fleeting.
Now the Fed is standing back again to see if the economy can grow without constant prodding. "A little bit of time to see what's going to happen is useful in making policy decisions," Mr. Bernanke said. He allowed, however, that the Fed could take additional steps, from declaring a longer period of near-zero interest rates to buying even more assets.
"We suspect that the Fed will stay on the sidelines for this year," Paul Ashworth, chief United States economist at Capital Economics, said in a note to clients. "As far as next year is concerned, in an environment where core inflation is falling again and economic growth remains muted, we still think that the Fed is more likely to loosen rather than tighten monetary policy."
The Fed projected that the unemployment rate would stand between 8.6 percent and 8.9 percent at the end of 2011, down slightly from the current rate of 9.1 percent, and that unemployment would be 7.8 percent to 8.2 percent by the end of 2012.
Ordinarily that would be a clear reason for the Fed to intervene. But the central bank increasingly is concerned about inflation. It aims to keep price increases at a steady rate of about 2 percent a year. The prices of oil and other commodities, which spiked this year, have begun to recede. But broader measures of prices have also climbed, exceeding that 2 percent goal.
The Fed's judgment is that those increases are most likely to taper off. The prices of long-term investments continue to reflect little concern about inflation. But the increases have been sufficient to convince the Fed's board -- even members who generally believe in acting aggressively to create jobs -- that the Fed cannot afford to expand aid programs.
The European debt crisis and the debate in Washington over the federal deficit also pose challenges for the Fed's management of the economy. Mr. Bernanke said that a "disorderly default" by Greece or another European country would unsettle financial markets and could have significant consequences for the American economy. He also renewed his warning that short-term cuts in government spending could retard growth, while at the same time urging a long-term deficit reduction plan, which he said could spur short-term growth.
The policy board next meets on Aug. 9.
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.