Fed Cuts Forecast For Growth

The Federal Reserve acknowledged Wednesday that growth and hiring are weaker than it expected — and said it will leave key short-term interest rates at "exceptionally low levels." Fed Chairman Ben Bernanke took questions from reporters at a mid-afternoon news conference.

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Today, the Federal Reserve cut its forecast for growth, saying the economy is up against headwinds that are stronger than expected. But Fed officials also said these headwinds are probably temporary, and they stopped short of announcing any further steps to stimulate growth. At their meeting today, Fed policymakers decided to leave interest rates right where they are.

And as NPR's Jim Zarroli reports, Fed Chairman Ben Bernanke continued a new policy, after the meeting, held a news conference to explain the Fed's actions.

JIM ZARROLI: Bernanke told reporters it would be months before the Fed even considered raising rates. He made clear that while the economy is still growing, it's doing so at a tepid pace, and growth has slowed even further this year. He said the economy will grow by 2.9 percent at best, a slight drop from previous forecasts, and unemployment could still be as high as 8.9 percent at year's end.

Mr. BEN BERNANKE (Chairman, Federal Reserve): In short, we expect the unemployment rate to continue to decline, but the pace of progress remains frustratingly slow.

ZARROLI: Bernanke said the economy had been hit by a rise in gasoline prices and by supply disruptions caused by the Japanese earthquake. He said these were temporary factors, and he said growth would probably pick up again once they eased. But Bernanke also held open the possibility that the long-term troubles facing the economy were more entrenched than Fed officials believed.

Mr. BERNANKE: One way to think about it is that maybe some of the headwinds that have been concerning us, like, you know, weakness in the financial sector, problems in the housing sector, some of these headwinds may be stronger and more persistent than we thought.

ZARROLI: Despite that, Bernanke told reporters that the Fed would go ahead with plans to quit buying long-term Treasury debt at the end of this month. The program, dubbed quantitative easing, was meant to bring down long-term interest rates, and Bernanke said it had succeeded. But he said the gains had been offset by the fact that lenders have tightened credit standards, something that's hurt the housing market in particular.

Mr. BERNANKE: So that roughly the bottom third of people who might have qualified for a prime mortgage, in terms of, say, FICO scores, a few years ago, cannot qualify today.

ZARROLI: Although this round of quantitative easing is ending, Bernanke said if the economy remains weak, the Fed has other measures it can try to get banks lending again, but he made clear he thinks such measures aren't needed just yet.

Bernanke was asked about the current debate over government spending and whether reducing the budget deficit would help the economy. He said sharp reductions in government spending would not help create jobs right now.

Mr. BERNANKE: So I think in the very short run, that, you know, the fiscal tightening is, at best, neutral and probably somewhat negative for job creation.

ZARROLI: But Bernanke said the deficit is a serious long-term issue and government officials need to get on with addressing it. At one point, Bernanke was asked about the Greek debt crisis and its potential effect on U.S. economic growth, he said the troubles in Greece would probably have just a small direct impact on financial institutions in the United States, but he said the crisis is very serious, anyway. He said the danger is that the crisis could spiral out of control in a way that would roil the global financial markets.

Jim Zarroli, NPR News.

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