THE US Federal Reserve has slashed its forecast for economic growth, raised projections for unemployment, and suggested Europe’s debt crisis poses big downside risks to the US economy.
However, it took note of a strengthening of the US economy in the third quarter and held monetary policy steady.
While the US central bank offered no direct hints it was considering fresh steps to help the economy in a post-meeting statement yesterday, one official pushed for action. In the end, the Fed mustered a 9-1 vote for a steady course.
“Economic growth strengthened somewhat in the third quarter,” the central bank said in the statement. “Nonetheless, recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated.”
It warned that there were “significant downside risks to the economic outlook, including strains in global financial markets”.
In fresh quarterly projections, the Fed lowered forecasts for growth and raised forecasts for unemployment for this year, 2012 and 2013. Policymakers did not see the jobless rate falling to a level they consider consistent with full employment even at the outer edge of their forecasting horizon, the final quarter of 2014.
Officials now expect the world’s largest economy to expand by a tepid 2.5 per cent to 2.9 per cent next year, down from the rosier 3.3 per cent to 3.7 per cent they were expecting in June.
They saw the unemployment rate going no lower than 8.5 per cent to 8.7 per cent by the end of 2012, up from the more sanguine 7.8 per cent to 8.2 per cent range envisioned in June.
Fed officials believe the economy will have reached full employment when the jobless rate drops to between 5.2 per cent and 6 per cent. In their forecast, the unemployment rate would still be at 6.8 per cent to 7.7 per cent at the end of 2014.
Fed chairman Ben Bernanke has called the high levels of US unemployment a national crisis, and some officials at the central bank have urged new steps to foster stronger growth.
Charles Evans, president of the Chicago Federal Reserve Bank, dissented yesterday because he wanted the central bank to ease policy at this meeting, while three officials who had voted against an easing in September supported the consensus.
The Fed was silent on whether it was considering the possibility of further bond purchases and provided no insight into the status of discussions on overhauling its communications policies. Officials had been debating both courses of action ahead of the meeting.
The central bank simply kept its options open, reiterating that it was prepared to adjust its balance sheet as needed to foster recovery.
US stocks held earlier gains after the statement was released, while prices for 10-year Treasury notes slipped.
“All eyes are quickly going to jump across the Atlantic to the south of France and the G20 comments on what is happening in Europe,” said Karl Mills, president of Jurika, Mills Keifer Investment Partners in Oakland, California, referring to the summit of leaders from the G20 nations this week which will focus on taming Europe’s debt crisis. – (Reuters)
