Tags: Fed | Economy

Fed: Economic Recovery Slowing But It's Only 'Temporary'

Wednesday, 22 Jun 2011 12:54 PM

 

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The Federal Reserve on Wednesday said the pace of economic recovery was proceeding more slowly than it had expected, but it expressed hope growth would pick up soon.

It also pinned a quickening of inflation largely on temporary factors, including higher commodity prices and supply chain disruptions from Japan's devastating earthquake.

The central bank said the forces pushing up prices should dissipate, allowing inflation to subside to levels consistent with price stability, even as growth revives.

"The slower pace of recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply-chain disruptions associated with the tragic events in Japan," the Fed said in a statement at the conclusion of a two-day meeting.

As widely expected, the Fed said it will maintain interest rates at exceptionally low levels for an extended period. It also confirmed it was ending its $600 billion bond-buying program at the end of the month, while reiterating that it will continue to reinvest principal payments from its holdings.

The Fed downgraded its view of the labor market, saying it had been "weaker than anticipated." That contrasted with the statement after its last meeting in April when it said the job market was "improving gradually."

U.S. stocks dipped after the Fed's statement was released, while prices for U.S. government bonds slipped and the dollar edged higher against the euro.

"The Fed statement did not offer any real surprises, but it did confirm the job situation is much weaker than was expected," said Daniel Penrod, senior industry analyst at the California Credit Union League in Ontario, California.

"The likelihood is that because of the weakness in the jobs sector, rates are going to stay low."

LONG CRAWL BACK

Two years after the end of the U.S. recession and unprecedented attempts by the Fed to boost growth, the recovery looks disappointingly weak.

While Fed officials have persistently said they expect growth to accelerate, reports since the Fed's April meeting point to a clear loss of momentum in the world's largest economy.

Employers have been reluctant to hire and the jobless rate remains stubbornly high, climbing to 9.1 percent in May. Housing — a central component of most U.S. families' wealth — remains mired in a deep slump.

With jobs uncertain and home values falling, consumer spending, which makes up around 70 percent of U.S. GDP, has lagged. Retail sales declined in May for the first time in 11 months.

Factory activity has been sluggish as well.

The economy grew at just a 1.8 percent annualized rate in the first three months of the year. Analysts expect growth in the second quarter to log a rate of around 2 percent, still not sufficient to generate a big uptick in hiring.

The Fed in April forecast the economy would grow between 3.1 percent and 3.3 percent in 2011 and 3.5 percent to 4.2 percent next year. It releases fresh forecasts later on Wednesday.

Even as growth has flagged, inflation has accelerated. Consumer prices posted their biggest year-on-year gain since October 2008 last month, and so-called core prices that exclude food and energy costs have also picked up.

The Fed cut interest rates to near zero in December 2008 and is on track to buy $2.3 trillion worth of longer-term securities by the end of June to stimulate economic growth. The latest buying program — purchases of $600 billion worth of Treasuries that is dubbed QE2 because it is the second round of what economists call quantitative easing — ends June 30.

Analysts have in recent weeks speculated the Fed may begin to consider what other tools it has to spur economic growth. Possible steps could include further asset purchases, or a bolstering of promises to markets that easy money policies will be in place until there are clear signs the recovery is taking off.

© 2014 Thomson/Reuters. All rights reserved.

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