The Federal Reserve sharply downgraded its projections for the U.S. economy Wednesday, warning that weak growth and high unemployment will be the norm for years.
The Fed expects that the unemployment rate will be around 8.6 percent at the end of next year, down only slightly from 9.1 percent today, and will still be between 6.8 percent and 7.7 percent in late 2014. In their June forecast, Fed officials said joblessness would come down faster, to around 8 percent by the end of 2012, when the next presidential election will take place.
Despite these projections, the Fed’s policymaking board declined during the two-day meeting that ended Wednesday to take any new action to boost growth, leaving ultra-low interest rates unchanged.
Leaders of the central bank are coming around to a view they had resisted: that the economy, weighed down by consumer debt and a depressed housing market, will not soon return to its old path of growth. The pace of economic growth the officials expect in 2012 is not high enough to put Americans back to work in large numbers.
Fed Chairman Ben S. Bernanke said Wednesday that problems in the housing market were more severe and stubborn than analysts had thought.
“Evidently . . . the drags on the recovery were stronger than we thought,” he told reporters at a news conference.
Economic growth picked up in the July-through-September months, to a 2.5 percent annual rate of growth. But that is not very fast for an economy with 9.1 percent unemployment, and both Bernanke and private analysts attribute the growth pickup in significant part to a reversal of the high fuel prices and other disruptions that held growth back earlier in the year.
In deciding not to take any new steps to invigorate the economy, the Fed’s policy committee noted that growth “strengthened somewhat” in recent months. The Fed took action at its last meeting, in September, to try to lower longer-term interest rates and encourage growth.
Government policy more broadly appears to be on hold, with few prospects for a deeply divided Congress to take steps that would encourage job creation. Bernanke signaled his consternation with this inaction, saying, “It would be helpful if we could get assistance from some other parts of the government to work with us to help create more jobs.”
Some Fed officials had argued for the central bank to take further action to pump up growth, such as beginning new purchases of mortgage-related securities to try to lower interest rates and support the housing market. Bernanke said the strategy was “certainly something we would consider if conditions were appropriate,” but he declined to be specific about what those economic conditions would be.
By declining to take new action, the Fed reserved some ammunition in case the economic outlook darkens further and the risk of a recession returns.
“It’s probably better to keep their gunpowder dry until there are more obvious signs of trouble,” said Bruce McCain, chief investment strategist at Key Private Bank. “If they move too quickly on a new easing program, they run the risk of ramping up the cost of commodities or financial markets in ways that complicate the inflation picture.”
One member of the policy board, Chicago Fed President Charles Evans, opposed the decision to stand pat, arguing that the Fed should have taken more steps to help the economy. While it has become common for board members who prefer less-aggressive policies to dissent from Fed decisions, Evans was the first one in four years who formally dissented because he favored stronger action.
Evans has argued for a variety of stronger steps to strengthen the economy and reduce unemployment but had not dissented from a Fed action.
At the past two Fed meetings, three policymakers dissented in the opposite direction, worried the Fed was doing too much to boost growth and thus risked fueling inflation. None did so at this meeting.
During the two-day meeting, the leaders of the central bank spent much of the time discussing how they communicate their expectations and goals for the economy.
Bernanke said no decisions had been made. But he noted several options the Fed might consider, such as announcing what it expects its interest rate policies to be over the years ahead. That would give the Fed greater ability to affect longer-term interest rates. For example, if the Fed said rates would probably be increased in 2014 instead of 2013, investors would accept lower rates because borrowed money would be cheaper for longer.
Another approach, advocated by Evans, would be to announce specific levels of unemployment or inflation that would prompt the Fed to begin raising interest rates, which have been near zero for almost three years. That approach could also help keep rates lower by clarifying how far off any interest rate hikes would be.
“That is certainly something that we have discussed and I think is an interesting alternative,” Bernanke said.