Fed lowers GDP forecast, holds policy steady

Updated: 2011-11-03 10:20


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WASHINGTON - The Federal Reserve on Wednesday slashed its forecast for economic growth, raised projections for unemployment and suggested Europe's debt crisis posed big downside risks to the US economy.

However, it took note of strengthening in 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, one official pushed for action. In the end, the Fed mustered a 9-1 vote for a steady course.

At a mid-afternoon news conference, Fed Chairman Ben Bernanke offered a measured assessment of the strains facing the economy.

"While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow," he said.

"Moreover, there are significant downside risks to the economic outlook, most notably concerns about European fiscal and banking issues (that) have contributed to strains in global financial markets, which have likely had adverse effects on confidence and growth," Bernanke added.

He said the US central bank was "closely" monitoring developments in Europe and left open the possibility that the Fed could expand its holdings of mortgage debt if US economic conditions worsened.

"I do think that purchases of mortgage-backed securities is a viable option. Certainly, something we would consider if the condition were appropriate," Bernanke said.

Weak signals

In fresh quarterly projections, the Fed lowered its forecasts for growth and raised its forecasts for unemployment for this year, 2012 and 2013. Policymakers did not see the jobless rate, now at 9.1 percent, 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 grow by a tepid 2.5 percent to 2.9 percent next year, down from the rosier 3.3 percent to 3.7 percent they were expecting in June.

They saw the unemployment rate going no lower than 8.5 percent to 8.7 percent by the end of 2012, up from the more sanguine 7.8 percent to 8.2 percent range envisioned in June.

Fed officials believe the economy will have reached full employment when the jobless rate drops to between 5.2 percent and 6 percent. In their forecast, the unemployment rate would still be at 6.8 percent to 7.7 percent at the end of 2014.

No sign of imminent policy shift

Bernanke has called the lofty level of US unemployment, which has held above 9 percent for the past five months, a national crisis. Some officials at the central bank have urged new steps to foster stronger growth.

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