Fed lowers outlook for economic growth

The Federal Reserve on Wednesday downgraded its outlook on the economy, lowering its prediction for annual growth to less than 3 percent of gross domestic product.

The Fed now expects the economy will grow between 2.7 percent and 2.9 percent in 2011, down from the 3.1 percent to 3.3 percent estimate it held in April. Federal Reserve Chairman Ben Bernanke acknowledged Wednesday that the recovery had hit a rough patch.

{mosads}”We don’t have a precise read on why this slower pace of growth is persisting,” he told reporters Wednesday after the most recent statement of the Federal Open Market Committee (FOMC). “Some of these headwinds may be stronger or more persistent than we thought.”

He added that the Fed expects unemployment will fall “painfully slowly.”

The Fed expects the unemployment rate will decline less quickly than earlier expectations. The Fed now expects the rate in 2011 to fall to between 8.6 percent and 8.9 percent, up from the 8.4 percent to 8.7 percent range expressed in April. The unemployment rate currently stands at 9.1 percent.

The reduced expecations came on the heels of a Fed statement that acknowledged the economic recovery was occurring “more slowly than … expected.”

Bernanke also said that there are looming threats both at
home and abroad to the nation’s economic growth. As congressional
negotiators seek to hammer out a deficit-reduction deal, he warned that
any plan that makes major spending cuts immediately would likely harm
the recovery, calling for a plan that addresses the deficit over the
long term.

“In the very short run, the fiscal tightening is at best neutral and
probably somewhat negative for job creation,” he said, adding that it
is “very desireable that we take strong action to lower our budget
deficits over the longer term.”

But beyond the timeframe, he demurred from wading further into the debate.

“We do need very seriously and urgently to address the overall
fiscal situation,” he said. “Exactly how that’s done is really the
responsibility of Congress.”

The continued economic turmoil in Europe as Greece struggles to
stay afloat poses its own threats, as Bernanke warned a Greek default
would threaten the global financial system.

Despite the tempered expectations, the Fed has maintained that it expects the economic recovery to gain steam as time passes, and its projections reflect that. The central bank expects the economy to grow 3.3 percent to 3.7 percent in 2012, down slightly from April’s estimate of 3.5 percent to 4.2 percent. But in 2013, its expectations are largely unchanged, with anticipated economic growth falling between 3.5 percent and 4.3 percent.

{mosads}And as the presidential campaign turns a spotlight on the 2012 economy, the Fed now expects the jobless rate will be somewhere between 7.8 percent and 8.2 percent in that year. The Fed previously estimated in April the jobless rate would be between 7.6 percent and 7.9 percent at that time.

Both Bernanke and the FOMC said there were several temporary factors weighing on the economy, such as a recent spike in food and fuel prices and the continued disruption of supply chains after the disasters in Japan.

On inflation, the Fed is mixed. It now expects inflation to grow by 2.3 percent to 2.5 percent in 2011, which falls in the middle of the range estimated in April of 2.1 percent to 2.8 percent. Its inflation expectations for 2011 and 2012 are now slightly higher than they were in April.

The numbers come after the Federal Open Market Committee announced Wednesday that even as the recovery slows, the Fed will be making no substantial changes to its existing policy. It maintained its plans to keep interest rates near zero for an extended period, while wrapping up the final purchases of its second quantitative easing program, dubbed QE2. That effort will draw to a close at the end of June.

When the Fed embarked on QE2, the economic picture was significantly different and in need of the easing, argued Bernanke. Deflation was a “non-trivial risk” and payroll growth was lower than it is today, he said.

“We are in a different position today. Certainly not where we would like to be, but closer,” he said.

This story updated at 3:48 pm.