Fed to permit bond-buying program’s end
WASHINGTON – Amid increasing domestic political pressure and turbulent global economic conditions, the Federal Reserve said Wednesday that it would let its massive bond-buying program expire in a matter of days and announced no new initiative to prop up the American economy – even as the central bank downgraded its economic assessment to reflect the sputtering recovery.
The Fed, upon concluding its two-day monetary policy meeting, said it would keep a key short-term interest rate at near zero for the foreseeable future to support the economy, but policymakers agreed to let lapse a $600 billion program to buy U.S. Treasury bonds at the end of this month, as scheduled.
Both moves were adopted unanimously and were widely expected by economists and Wall Street investors, but it means the end of a major monetary stimulus effort at a time when the economy is weakening and there is little chance of new large-scale economic support from the government.
Fed officials are betting that, even without additional monetary or fiscal stimulus, U.S. economic growth will pick up in the latter part of the year after a disappointing first half.
In its statement Wednesday, the Fed described the economic recovery as “continuing at a moderate pace.” But it acknowledged that growth was slower than it had anticipated, singling out the weaker-than-expected labor market.
The projected growth, for instance, for this year’s gross domestic product, the value of all goods and services produced, was lowered to a range of 2.7 percent to 2.9 percent, down from the April forecast of 3.1 percent to 3.3 percent. GDP outlook for 2012 also was revised significantly lower to 3.7 percent at the high end of the range from a high of 4.2 percent.
The projection for core inflation, which doesn’t include volatile gas and food prices, also was expected to be somewhat higher than previously estimated for this year and next, though still within the Fed’s target of 2 percent.
And the Fed painted a gloomier picture for the job market. The nation’s unemployment rate now is seen as remaining near 9 percent throughout this year; most Fed officials previously believed that it would dip closer to 8.5 percent. It edged up to 9.1 percent in May.
But the Fed said the slower recovery reflected in part “factors that are likely to be temporary,” including high oil prices that sapped consumer purchasing power and Japan’s earthquake and tsunami that disrupted businesses, particularly in the auto and electronics industries.
Even so, many analysts have lowered their forecasts and remain worried about the outlook because of the prolonged weakness in the American housing and job markets, and more recently the turmoil over the debt-restructuring problems in Greece and the political brawl in Washington over the federal deficit and the looming debt ceiling deadline.
In recent days, the Fed chief has come under fire from Republican presidential candidates – and not just from his long-time nemesis, Ron Paul, the Texas congressman who has built a career trying to abolish the Fed.
Rep. Michele Bachmann, R-Minn., has complained about Fed policies weakening the American dollar. And Newt Gringrich, the former House speaker, was expected to add to the criticisms Wednesday in calling for a limit to Fed powers.
Bernanke faces pressures from the left as well, and they may well intensify if job growth doesn’t pick up and unemployment remains high.
“If the job market goes bad in June, it could well trigger a conversation between (President Barack) Obama and Ben,” said Phil Orlando, chief equity strategist for Federated Investors.
Obama, whose handling of the economy may be the biggest obstacle to his re-election, will be looking to Bernanke to do more to spur job creation, but many think the Fed chairman is out of bullets. “There will be extraordinary pressure on the Fed,” Orlando said.