Bloomberg News

Fed Says ‘Downside Risks’ Remain as Economic Outlook Cut

November 16, 2011

(Updates with Bernanke comment in second paragraph.)

Nov. 2 (Bloomberg) -- Federal Reserve policy makers said the economy has picked up while “significant downside risks” remain, and they refrained from taking any additional steps to ease monetary policy.

Fed officials also lowered their economic-growth projections compared with June and said the unemployment rate will decline at a slower pace. Fed Chairman Ben S. Bernanke, in a press briefing, said the pace of improvement is likely to be “frustratingly slow” and that the central bank made no decisions about giving more information on its policies through public communications.

Policy makers led by Bernanke may be waiting to see if unconventional policy steps from their last two meetings help the expansion gain strength before embarking on new initiatives. While the economy grew last quarter at the fastest pace in a year, that is still insufficient to push down the unemployment rate, and officials have said the U.S. remains vulnerable to shocks from the European debt crisis.

“Economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year,” the Federal Open Market Committee said today in Washington after a two-day meeting. At the same time, “recent indicators point to continuing weakness in overall labor market conditions.”

Treasuries erased losses after the statement, leaving the 10-year yield at 1.99 percent at 2:41 p.m. in New York, unchanged from late yesterday. The Standard & Poor’s 500 Index rose 1.1 percent to 1,232.21.

Benchmark Rate

The Fed left unchanged its pledge to keep the benchmark interest rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.” The central bank has kept the target federal funds rate in a range of zero to 0.25 percent since December 2008.

The vote for the statement was 9-1. Chicago Fed President Charles Evans voted against the decision, the first dissent in favor of easier policy since Boston Fed President Eric Rosengren in December 2007. Evans favored “additional policy accommodation.”

At the last two meetings, Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia’s Charles Plosser dissented against decisions to ease policy. They supported today’s statement.

“The committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability,” the statement said.

Operation Twist

The central bank also said it would continue its plan to purchase $400 billion of longer-term U.S. bonds by June 2012 while selling the same amount of short-term debt, a program known as Operation Twist. It also will continue reinvesting proceeds from housing debt into mortgage-backed securities.

Inflation “appears to have moderated since earlier in the year,” the statement said, repeating earlier language. The Fed’s preferred price gauge, which excludes food and energy costs, rose 1.6 percent in September from a year earlier, compared with a 1 percent gain in March. Including all items, prices rose 2.9 percent in September from a year earlier, the quickest pace since October 2008.

“Household spending has increased at a somewhat faster pace in recent months,” the Fed said. “The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.”

Laying Groundwork

Economists in a Bloomberg News survey predicted Fed officials would lay the groundwork for further large-scale asset purchases while refraining from making such a decision at today’s meeting. A plurality of 36 percent saw purchases beginning in the first quarter of 2012.

“The central bank is grappling to use tools in an environment in which it clearly feels somewhat limited in its ability to impact the mortgage market and impact the economy,” Bruce Kasman, chief economist for JPMorgan Chase & Co. in New York, said today in an interview with Bloomberg Television.

Evans’s dissent probably reflects the concerns of at least three or four other members on the committee, Kasman said. That camp believes “the Fed needs to work towards getting growth solid enough to get the unemployment rate down materially,” Kasman said.

Ira Jersey, the New York-based director of U.S. rates strategy at Credit Suisse Group AG, said the change in dissents from the last meeting “means we could get more accommodation in the future since you have some of the hawks perhaps backing off from their opposition to accommodation.”

Growth Forecasts

Gross domestic product, adjusted for inflation, will rise by 2.5 percent to 2.9 percent next year, compared with a range of 3.3 percent to 3.7 percent from the prior projections in June, according to the median range of economic projections from the 17 governors and regional Fed presidents. Growth in 2013 will be 3 percent to 3.5 percent, lower than the prior range of 3.5 percent to 4.2 percent.

The jobless rate in the fourth quarter of 2012 will range from 8.5 percent to 8.7 percent, up from the previous forecast of 7.8 percent to 8.2 percent, the Fed said in a release separate from the FOMC statement.

The old 2012 projection is now the new 2013 projection for fourth-quarter unemployment of 7.8 percent to 8.2 percent, compared with a range of 7 percent to 7.5 percent in June. By the end of 2014, the jobless rate will be 6.8 percent to 7.7 percent, officials said in their initial projections for the year.

Price Outlook

Inflation forecasts were little changed for 2012 and 2013, with officials projecting price increases close to long-run goals of 1.7 percent to 2 percent. U.S. central bankers revise their forecasts four times a year according to a predetermined schedule.

With the benchmark interest rate already at zero, the central bank bought $2.3 trillion in debt from December 2008 through June of this year in two rounds of so-called quantitative easing aimed at lowering borrowing costs for companies and consumers.

Some officials in September wanted to keep further asset purchases as an option to boost the economy as policy makers saw “considerable uncertainty” that U.S. growth will pick up, according to minutes of the meeting, released on Oct. 12.

Stocks have climbed and the economy has picked up since the Sept. 20-21 gathering. The Standard & Poor’s 500 Index advanced 11 percent in October, the best since 1991, as European leaders agreed to expand their bailout fund. The rally snapped five months of losses.

Construction Equipment

Caterpillar Inc., the world’s largest construction and mining-equipment maker, is among firms reporting continued growth. The Peoria, Illinois-based manufacturer added 4,800 jobs in the third quarter, 2,000 of them in the U.S., and said its revenue in 2012 will rise 10 percent to 20 percent.

“Although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point,” Chief Executive Officer Doug Oberhelman said in an Oct. 24 statement.

Still, growth and job creation haven’t been fast enough to lower the unemployment rate.

The Labor Department will report Nov. 4 that the payrolls expanded by 95,000 jobs in October, according to the median estimate of a Bloomberg survey of 65 economists. Unemployment is forecast to remain at 9.1 percent for the fourth consecutive month.

Housing Slump

Housing, the industry at the heart of the financial crisis, has also held back the recovery. Sales of previously owned homes fell 3 percent in September to a 4.91 million annual rate, according to the National Association of Realtors. The median price dropped 3.5 percent from a year earlier, and about one in five real-estate agents polled said contracts had been canceled, the group said.

“Housing continues to hang like an albatross around the necks of homeowners and the economy as a whole,” Fed Governor Daniel Tarullo said in an Oct. 20 speech, urging his fellow policy makers to consider further purchases of housing debt to lower mortgage costs and help homeowners refinance.

Policy makers have also been considering communications tools to help shape public expectations for the future path of interest rates.

A subcommittee led by Fed Board Vice Chairman Janet Yellen has looked into publishing more precise information about the FOMC’s goals for prices and employment, and more guidance about how policy changes are linked to those goals, according to minutes of the September meeting.

--With assistance from Vivien Lou Chen in San Francisco, Scott Lanman in Washington and Tom Keene and Cordell Eddings in New York. Editors: Christopher Wellisz, James Tyson

To contact the reporter on this story: Joshua Zumbrun in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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