US Fed issues downbeat growth forceast

The US Federal Reserve today painted a bleaker outlook for the nation's economy, which it thinks will grow much more slowly and face higher unemployment than it had estimated in June.

The Fed now predicts the economy will grow at a scant 1.6% to 1.7% for 2011. For 2012, it thinks growth will range between 2.5% and 2.9%. Both forecasts are roughly a full percentage point lower than its June forecast.

The Fed sees unemployment of between 8.5% and 8.7% next year, which compares to its forecast made in June of unemployment dropping in 2012 to as low as 7.8%. The rate is now 9.1%.

Even so, the Fed said after its policy meeting that the economy had improved since nearly stalling in the spring. As a result, it is putting off any new actions so it can gauge the impact of steps already taken.

Fed policymakers made the announcement after a two-day meeting.

In a statement, the officials said consumers have stepped up spending. Still, they said the economy continues to face significant risks, including the debt crisis and risk of recession in Europe.

The Fed left open the possibility of taking further steps later to try to boost the sluggish economy. But it gave no hint as to what those moves might be.

"They're noting the better growth numbers but remain pretty cautious," said Michael Feroli, a former Fed economist now with JPMorgan Chase. "They're not celebrating by any means, which probably is appropriate."

The vote was 9-1. Charles Evans, the president of the Chicago Federal Reserve Bank, dissented. The statement said Mr Evans wanted to take stronger action to try to boost the economy.

The vote was a shift from the previous two Fed meetings, when three members had dissented for the opposite reason: They opposed the Fed's continued efforts to keep rates at super-lows, for fear it could ignite inflation. Those three members, known as inflation "hawks", dropped their opposition this time.

Some analysts said they expected the Fed to take further action to support the economy at coming meetings, given their expectation that growth will remain sub-par.

"Policymakers are keeping the door open because the unemployment rate remains high, and there are clear downside risks from the economic situation in Europe," said Sal Guatieri, senior economist at BMO Capital Markets.

After their September meeting, the policymakers said they would shuffle the Fed's investment portfolio to try to further reduce long-term interest rates. And in their previous meeting in August, they had said they plan to keep short-term rates near zero until at least mid-2013, unless the economy improved.

The Fed repeated the mid-2013 target in its statement today. It also said it was continuing its programme to rebalance its portfolio to try to lower long-term rates.

The Fed has kept its key short-term interest rate at a record low since December 2008. This is the rate that banks charge on overnight loans. It serves as the benchmark for millions of business and consumer loans.

Federal Reserve chairman Ben Bernanke acknowledged the pace of US economic growth is likely to be "frustratingly slow".

Mr Bernanke cited the debt crisis in Europe as a particular concern, saying it could have adverse effects on confidence and growth. As a result, the central bank is closely monitoring the situation, he said.

When asked if the Fed would purchase more mortgage-backed securities to help the depressed housing market, Mr Bernanke said that was a "viable option", but declined to say if, or when, the Fed would pursue such action.

"We remain prepared to take action as appropriate to make sure the recovery continues," Mr Bernanke said.

Mr Bernanke also said he sympathised with Occupy Wall Street protesters' complaints about the economy.

"I am dissatisfied with the state of the economy," he said. "Unemployment is too high."

But the Fed chairman said criticism from Republicans, both in Congress and those running for president, was not valid. They have charged that the central bank's efforts have set the stage for higher inflation in the future.

Mr Bernanke said he felt the central bank had a very good record on inflation, though he admitted the Fed has fallen short in dealing with unemployment.