Federal Reserve officials decided to keep the central bank’s balance sheet at a record to spur the slowing economy after completing $600 billion of bond purchases this month.
“The economic recovery appears to be proceeding at a moderate pace, though somewhat more slowly than the committee had expected,” Fed Chairman Ben S. Bernanke said at a press conference after a meeting of the Federal Open Market Committee. Bernanke and his colleagues on the panel cut their growth forecasts for this year and next and raised their estimates for the unemployment rate, driving stocks lower.
Bernanke said that unemployment, now at 9.1 percent, will come down “very painfully slowly” even after the pace of economic growth picks up starting in the second half of the year. Some of the reasons for the slowdown, such as higher commodity prices and supply-chain disruptions caused by the March earthquake and tsunami in Japan, will be temporary, he said. Others, including declines in home prices and financial-sector weakness, may be more long-lasting.
“Some of these headwinds may be stronger and more persistent than we thought,” Bernanke said. “We don’t have a precise read on why this slower pace of growth is persisting.”
Stocks fell, ending a four-day rally. The Standard & Poor’s 500 Index declined 0.7 percent to 1,287.14 at the 4 p.m. close of trading in New York. The yield on the 10-year Treasury note was 2.98 percent, little changed from late yesterday.
Bernanke said the Fed has options to further stimulate the economy, such as undertaking additional bond purchases or strengthening its commitment to holding rates lower for longer.
“They have their own costs,” he said. “But we’d be prepared to take additional action, obviously, if conditions warranted,” he said.
At the same time, he stressed that the economy has improved since last August, when he first indicated that the Fed might embark on a second round of large-scale asset purchases to stave off the threat of a broad-based decline in prices.
“The current outlook is significantly different than what we were facing in -- in August of last year,” he said. “We no longer have a deflation risk.”
Bernanke is keeping his options open on the Fed’s next step, said Jerry Webman, chief economist and senior investment officer at OppenheimerFunds in New York.
On the Horizon
“It’s pretty clear that they don’t see anything on the horizon that would get them to adjust policy one way or the other,” said Webman. “There has got to be a wait-and-see period to see what effects some of these temporary exogenous factors will have.”
The Fed left its benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, and repeated a pledge to keep it there “for an extended period.” The decision was unanimous.
In his press conference, Bernanke said an “extended period” means the Fed would maintain rates at low levels for at least two or three meetings. The Fed meets eight times a year.
“The thrust of extended period is that we believe we’re at least two or three meetings away from taking any further action,” he said. “And I emphasize at least. But depending on how the economy evolves, and inflation and unemployment, it could be, you know, significantly longer.”
The Fed will aim to keep the domestic securities holdings in its System Open Market Account at about $2.654 trillion, according to separate a statement today from the Federal Reserve Bank of New York.
“They want to keep as accommodative as possible for as long as they can to hopefully add some juice to the economy and raise demand until the recovery is on a firmer footing,” said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “They acknowledged economic conditions have deteriorated since the April meeting.”
The U.S. economy grew at an annual rate of 1.8 percent in the first quarter, down from 3.1 percent in the fourth quarter of 2010, and recent data have shown manufacturing and consumer and business sentiment weakening.
Fed governors and regional-bank presidents now say the economy will expand by 2.7 percent to 2.9 percent this year, down from April’s forecasts of 3.1 percent to 3.3 percent, based on the median range of projections. Growth in 2012 will range from 3.3 percent to 3.7 percent, compared with forecasts of 3.5 percent to 4.2 percent in April, the Fed said.
Central bankers raised their forecast range for the U.S. unemployment rate to average 8.6 percent to 8.9 percent in the fourth quarter of 2011, compared with projections of 8.4 percent to 8.7 percent in April. For the fourth quarter of 2012, the rate will average 7.8 percent to 8.2 percent, versus prior forecasts of 7.6 percent to 7.9 percent.
Inflation excluding food and energy prices will range from 1.5 percent to 1.8 percent this year, the projections today showed, up from 1.3 percent to 1.6 percent in the April forecasts. That’s based on the Commerce Department’s core personal consumption expenditures price index.
“Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate,” the statement said.
Bernanke said on June 7 that policy makers will “closely monitor” inflation, while predicting that price increases will ease in the medium term. The consumer price index rose 3.6 percent for the 12 months ending in May, the most since October 2008, as food and fuel prices drove the benchmark higher. So-called core CPI, the index excluding food and fuel, rose 1.5 percent during the same period, the most since January 2010.