The Fed said it expects the economy to grow between 1.9 percent and 2.4 percent this year — a dramatic half-percentage-point downgrade from just two months ago — and projected that unemployment would probably remain at 8.2 percent for much of this year and perhaps still be as high as 8 percent at the end of 2013.
“We’ve taken a step today which is a substantive step,” Fed Chairman Ben S. Bernanke said. “Moreover, we have stated that we’re prepared to take further steps, if necessary, to promote sustainable growth and recovery in the labor market.”
But the Fed’s decision to extend the program known as “Operation Twist” for six months highlights how the central bank, the Obama administration and Congress are struggling to make a major dent in unemployment, three years after the economy officially started growing again.
The first round of the Fed program, which aimed to reduce interest rates on loans, is estimated by outside economists to have trimmed borrowing costs by only 15 or 20 cents for every $100 borrowed, a fairly modest impact. (That amounts to a yearly savings of $600 on a $300,000 mortgage.) The next round may have even less punch.
Likewise, other recent federal efforts to pump fuel into the economy have failed to have a major effect.
For instance, President Obama and Congress agreed in 2011 and 2012 to cuts in workers’ payroll taxes, giving people more money to spend. But a succession of unexpected developments has largely offset that stimulus. The list of setbacks includes the disruptive earthquake in Japan, spikes in gasoline and food prices, and a decline in foreign demand for U.S. goods and services as a result of the European financial crisis and a slowdown in emerging markets such as China and Brazil.
Obama, Congress and the Fed have also struggled to address the weakened housing market, which continues to weigh on the wider economy.
A key way that Fed policies work is by reducing interest rates on mortgages, which encourages people to buy new homes and frees up money for existing homeowners who refinance their homes at lower rates.
Yet this has not been happening as much as officials had hoped. In many cases, homeowners are underwater, meaning they owe more than their loans are worth, and are unable to refinance, while banks are reluctant to lend to new borrowers whose credit records have been hit hard in the past few years.
Meanwhile, Obama is touting a number of short-term measures to gin up growth — for example, additional tax cuts to spur business hiring and a plan to provide more funding to state and local governments. But Congress is unlikely to take up either. Republicans argue that cutting government spending and scaling back regulations is a better way to energize the economy.