Fed sees slower growth; Bernanke cautions on spending cuts

McClatchy NewspapersJune 22, 2011 

WASHINGTON — The Federal Reserve on Wednesday again dialed back its projections for U.S. economic growth, foreseeing slower growth this year and next than it had forecast previously, and Chairman Ben Bernanke implored Congress to avoid steep spending cuts anytime soon that would further slow recovery.

The projections came following a meeting of the policy-making Federal Open Market Committee, where members left the Fed's benchmark short-term interest rate where it's been since December 2008 — in a range between zero and 0.25 percent.

The FOMC also announced that it will conclude the last of its $600 billion in purchases of Treasury securities this month as expected. Those purchases were an unprecedented move intended to spark investors to take riskier choices than government bonds by driving down the bonds' price, but one that some critics blame for helping to lead speculators to push up prices of oil and other commodities.

In his second news conference, Bernanke made it clear that the U.S. economy's recovery continues, albeit at a slower pace than desired.

The FOMC's central forecast is now for the economy to grow at a rate between 2.7 percent and 2.9 percent this year. That's down from its April forecast of 3.1 percent to 3.3 percent. The unemployment rate is now projected to end up between 8.6 and 8.9 percent this year, higher than the 8.4 percent to 8.7 percent projected in April, but lower than May's 9.1 percent monthly rate.

Similarly, the projection for growth next year is now 3.3 percent to 3.7 percent, slower than the 3.5 percent to 4.2 percent projected in April. The jobless rate next year is now thought to fall between 7.8 percent and 8.2 percent, a bit higher than the 7.6 percent to 7.9 percent range projected in April.

The economy is trying to claw back from the worst downturn since the Great Depression and a financial shock that Bernanke, a Depression scholar who taught economics at Princeton, described as possibly the worst in nation's history. More than 8 million jobs were lost, and the Fed chief cautioned that there's still great uncertainty.

"The reduced pace of the recovery partly reflects factors that are likely to be temporary," Bernanke said, pointing to declining oil prices and global auto parts shortages that followed Japan's recent earthquake and tsunami.

He was asked why growth was downgraded for next year if the causes of the current slowdown are temporary.

"We don't have a precise read as to why this slower pace of growth is persisting," the Fed chief answered. "One way to think about it is that maybe some of the headwinds that have been hurting us, like, you know, weakness in the financial sector, problems in the housing sector, balance sheets ... some of these may be stronger and more persistent than we thought."

The Fed chief warned that steep near-term cuts in government spending would slow the economy and cost jobs. He advocated a budget deal in Congress that begins to address long-term challenges, but warned against sharp spending declines too soon.

"...In light of the weak recovery, it would be best not to have sudden and sharp consolidation in the very near term that doesn't do so much for the overall budget situation but is just negative for growth," Bernanke said. "My answer is that I hope that the congressional negotiators will take a longer-term view."

While Bernanke sought to stay above partisan politics, his views conflict with House Speaker John Boehner, R-Ohio, who has railed against government spending and insists that cutting it deeply will create jobs.

"I don't think that sharp immediate cuts in the deficit will create more jobs. I think in the very short run, we are already seeing a certain amount of fiscal drag coming from state and local government as well as the withdrawal of previous federal stimulus," said Bernanke, first nominated by a Republican president and re-nominated a Democratic one. "What people should understand is that our budgetary problems are very long-run in nature."

He suggested attacking the deficit over a period of 10 years, and longer for entitlement programs such as Medicare.

Asked about comments by his predecessor, Alan Greenspan, that the nation needs to return to the higher tax rates of the booming 1990s to help bring down deficits, Bernanke said that's a matter for Congress to decide.

Bernanke said big U.S. banks have conducted stress tests and determined they should be able to handle any fallout from an expected debt default by Greece and possibly other European nations. The Fed is monitoring money market funds, he said, which are indirectly exposed to defaults since they are heavily invested in bonds issued by European banks.

ON THE WEB

FOMC Statement

FOMC revised forecast

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McClatchy Newspapers 2011

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