Fed softens economy view as it renews low-rate vow

WASHINGTON Wed Jun 23, 2010 7:27pm EDT

U.S. Federal Reserve Chairman Ben Bernanke testifies to the House Budget Committee on Capitol Hill in Washington June 9, 2010. REUTERS/Joshua Roberts

U.S. Federal Reserve Chairman Ben Bernanke testifies to the House Budget Committee on Capitol Hill in Washington June 9, 2010.

Credit: Reuters/Joshua Roberts

WASHINGTON (Reuters) - The Federal Reserve acknowledged a faltering pace of U.S. economic recovery on Wednesday as it renewed its vow to hold benchmark interest rates exceptionally low for an extended period.

In a statement at the end of a two-day meeting, the Fed scaled back its assessment of the pace of recovery, taking note of pockets of weakness, and also issued a cautionary note about volatile financial markets in light of Europe's debt woes.

But it stuck to its expectation that the economy will continue to gradually emerge from the worst recession in decades.

"Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," the central bank said in a statement.

As expected, the Fed held overnight rates in the zero to 0.25 percent range set in December 2008 as it fought the deep recession and virulent financial crisis.

U.S. stocks ended mixed after a volatile session, while prices for U.S. government bonds rose and the dollar extended losses against the euro and yen.

"In early May a substantial minority of analysts were looking for the Fed to alter the language on extended period in June to prepare for an August rate hike. All that has gone out the window," said Cary Leahey, an economist for Decision Economics in New York.

Kansas City Federal Reserve Bank President Thomas Hoenig dissented for the fourth consecutive meeting, arguing that the Fed's promise to hold rates ultra low for a long time risks perpetuating a boom-and-bust cycle.

The Fed said the economic recovery was "proceeding," a downgrade from its assessment in April when it said the economy had continued to strengthen.

Policymakers nodded to a slowdown that has become evident in housing. In April, they had noted that housing starts had "edged up," but on Wednesday they said only that starts "remain at a depressed level."

The central bank also tempered its view of consumer spending, saying it was "increasing but remains constrained by high unemployment, modest income growth and lower housing wealth." In April, it said spending had picked up.

The Fed also took note of a recent softening of inflation. It cited a decline in energy and other commodity prices and said underlying inflation had also trended lower.


Recent disappointing jobs and housing market reports, financial turmoil in Europe and a four-decade low in a key inflation metric have raised doubts about the outlook, prompting some analysts to push back forecasts for Fed rate hikes.

While most economists think a rate increase will still be the next step, some have suggested the Fed should consider additional ways to spur growth and lending.

But the Fed offered no hints that it plans any such move.

A report on Wednesday showing sales of new single-family homes plunged to a record low in May after a popular homebuyer tax credit expired dealt a clear setback to hopes for a speedy pickup in growth.

Fed Chairman Ben Bernanke told a congressional panel earlier this month he believes the economy has effectively made the shift to private demand after a period of government-provided life support.

He said he expects the world's largest economy to expand at a 3 percent annualized rate this year and gain steam in 2011.

Still, Bernanke cautioned that "a significant amount of time" would be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009.

The Fed's own anecdotal summary of economic conditions compiled for this week's meeting found that while conditions were still improving, the pace of growth was modest.

Some Fed officials have said in recent weeks they see the pickup in growth gaining momentum. Kansas City's Hoenig has argued the recovery is strong enough, and the risks of inflation from the Fed's easy money policies are serious enough, that raising rates to 1 percent fairly soon is warranted.

A Reuters poll of primary dealers conducted after the Fed statement on Wednesday showed the U.S. Federal Reserve is not expected to raise short term interest rates from the current level of near zero until at least next year.

Of the primary dealers surveyed, 13 of 15 said they expect the U.S. central bank will increase official rates in 2011, while the remaining two are forecasting steady, ultra-low rates through next year.

Three of the primary dealers pushed back the timing of their forecasts for rate rises from a similar poll conducted by Reuters earlier this month.

(Additional reporting by Pedro Nicolaci da Costa, Emily Kaiser and David Lawder)

(Editing by Andrea Ricci and Dan Grebler)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (27)
tbink wrote:
Contradictory blather. They just do not know what is going to happen!

Jun 23, 2010 8:44am EDT  --  Report as abuse
mckibbinusa wrote:
Clearly, the Fed has decided that there is nothing more that can be done to save the economy — the Fed is leaving the recovery to fate…

Jun 23, 2010 9:44am EDT  --  Report as abuse
GratefulEd wrote:
ha ha ha ha ha ha ha Bernanke says what?
ha ha ha ha, ineffective loser sits on the sidelines, perhaps so he doesn’t put his foot in his mouth again as he continually has a wont to do due to his mysterious inability to “see” problems yet his heroic ability to fix them by leaping tall buildings and going faster than a speeding bullet and whatever computer aided methods he uses to hide the numbers in doublespeak‚Ķ
its so stupid its very very hard to even bother to look at what the clown says!

Jun 23, 2010 9:45am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Recommended Newsletters

Reuters U.S. Top News
A quick-fix on the day's news published with Reuters videos and award-winning news photography and delivered at your choice of one of four times during the day.
Reuters Deals Today
The latest Reuters articles on M&A, IPOs, private equity, hedge funds and regulatory updates delivered to your inbox each day.
Reuters Technology Report
Your daily briefing on the latest tech developments from around the world from Reuters expert tech correspondents.