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Federal Reserve cuts forecast for US economic growth

Category: Business

Published: 20th Jun 2012 19:52:30

The Federal Reserve has cut its forecast for economic growth in 2012 from 2.9% to 2.4%.

It has also predicted a central unemployment rate of up to 8.2%, having forecast up to 8% on 25 April.

The central bank also extended its programme of swapping short-term bonds for long-term ones, known as Operation Twist, until the end of the year.

The idea of the programme is to cut the long-term cost of borrowing for businesses and households.

The programme is worth $267bn (£170bn).

In a news conference, Federal Reserve chairman Ben Bernanke said unemployment was still too high and was going down too slowly.

"We are prepared to take further steps if necessary to promote sustainable growth and recovery in the labour market," he said.

The rise in the central prediction of the unemployment rate came after the jobless rate rose from 8.1% to 8.2% in April.

The Federal Reserve Monetary Policy Committee's decision on Operation Twist was not unanimous, with one of the 12 members voting against it.

The Fed's twisting in a chill economic wind. Its move is a reaction to its fairly gloomy assessment of the state of the US economy. It says the recovery in America is still happening, but it has slowed down, and what's going on in the rest of the world poses "significant risks".

So it's acting to keep long-term interest rates low, which it hopes will encourage people to spend and businesses to take on more workers. It's the extension of a policy that began last September and the jury is out on whether it has worked so far.

In the current political environment the Fed is the only actor with a role. Even if there wasn't a presidential election looming, Congress would still be deadlocked and neither Democratic nor Republican plans stand a chance of being turned into reality. The Fed could print more money (or the modern equivalent) but that would be hugely politically controversial. The bottom line is it's not doing much, but it's the only one doing anything to prop up a faltering recovery.

Jeffery Lacker, the president of the Richmond Regional Fed Bank, had also voted against the previous three decisions.

Operation Twist involves the Federal Reserve buying bonds that have between six and 30 years left on them and selling equal amount of bonds with less than three years left.

"The Fed was more concerned about the economy than they have been and eased by extending Operation Twist," said Allen Sinai, chief executive of Decision Economics in New York.

"They appear to be holding more firepower in reserve in case things get worse."

The central bank's statement pointed out that "growth in employment has slowed in recent months, and the unemployment rate remains elevated".

It kept interest rates unchanged at the level of zero to 0.25%.

There was a muted response on the markets to the Federal Reserve's borrowing decision, although much of the rally earlier in the week was attributed to hopes of more stimulus measures.

Wall Street shares were barely moved by the decision, the yields on US government bonds were also unaffected and the dollar rose against the euro.

"The Fed extending Twist was expected," said Fred Dickson, chief market strategist at DA Davidson and Co in Oregon.

"There may be some disappointment that the Fed didn't provide any strong hints in terms of new policy announcements."

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BBC News, 2012. Federal Reserve cuts forecast for US economic growth [Online] (Updated 20th Jun 2012)
Available at: http://www.ukwirednews.com/news/1435898/Federal-Reserve-cuts-forecast-for-US-economic-growth [Accessed 20th Aug 2014]

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