Fed groping for growth

Article by: BINYAMIN APPELBAUM , New York Times
Updated: June 20, 2012 - 11:53 PM

The Fed acted, but with restraint, offering a modest expansion of its efforts to stimulate growth.

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At a news conference Wednesday in Washington, Federal Reserve Chairman Ben Bernanke said the Federal Reserve is open to purchasing more Treasury bonds to lower long-term interest rates and boost growth if the economy worsens. “If we don’t see further improvement in the labor market, we will be prepared to take additional steps,” he said.

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WASHINGTON - In a pattern that has become familiar, the Federal Reserve said Wednesday that the economy was growing more slowly than it had forecast, in part because its efforts to hasten recovery had proved insufficient.

With the economy stumbling into the summer months after the false promise of a relatively strong winter, the Fed announced a modest expansion of its efforts to stimulate growth.

The Fed said its senior officials now expected growth of 1.9 percent to 2.4 percent this year, half a percentage point lower than they forecast in April. They predicted the unemployment rate would not drop below 8 percent this year, and that inflation would not climb above 1.7 percent.

Those are the vital signs of a patient who will be ill for some time. And the Fed noted that the outlook could worsen if events in Europe unnerved financial markets or if politicians in Washington failed to resolve a stalemate over fiscal policy.

The central bank pledged to buy $267 billion in long-term Treasury securities over the next six months as part of a continuing campaign to reduce borrowing costs.

It is the first time since January that the Fed has intensified its efforts to revive economic growth, and the first time since September that it has announced a new round of asset purchases. This is the fifth such announcement since 2008.

But the new program is not large enough to provide significant economic support. Instead it amounts to a placeholder, an effort to soothe markets and preserve the status quo while the Fed seeks greater clarity about the health of the economic recovery.

"We have to get further information about the state of the economy, about where things are going and about what's happening in Europe," Ben Bernanke, the chairman of the Federal Reserve, said at a news conference after the release of the policy statement and projections.

His comments raised the prospect that the Fed would act again later this year.

"We are prepared to do what is necessary," he said, in a version of the pledge that has become his byword. "We are prepared to provide support for the economy."

The Fed is already engaged in broad efforts to reduce borrowing costs for businesses and consumers. It has kept short-term interest rates near zero since late 2008 and is holding more than $2.5 trillion in Treasuries and mortgage-backed securities to hold long-term interest rates down.

But the unemployment rate, after declining rapidly during the final months of 2008, has stalled above 8 percent. More than 20 million Americans could not find full-time work last month, three years after the recession ended.

The Fed's policymaking committee said Wednesday that while it expected growth would continue at a "moderate pace," job creation and household spending both slowed in recent months. Bernanke said the housing depression, domestic fiscal policy and Europe's downturn were dragging on growth.

The Fed's economic forecast, released separately, reflected reduced prospects for 2013. Officials estimated the nation's economy would grow from 2.2 percent to 2.8 percent next year, down from its April projection of 2.7 percent to 3.1 percent. They now expect the unemployment rate to range from 7.5 to 8 percent at the end of 2013.

The new asset purchases extend a commitment scheduled to end this month to buy $400 million in Treasurys, known as "Operation Twist" because the purchases are financed by sales from the Fed's holdings of short-term securities.

Studies of this first installment of Operation Twist have concluded that it reduced long-term interest rates by 0.15 to 0.20 percentage points. But its economic impact, like those of the Fed's earlier asset purchases, has been muted by the inability of many businesses and consumers to obtain loans.

The decision was supported by 11 members of the committee. The only opposition came from Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.