Fri, Jun 24, 2011 - Page 10 News List

Fed freezes policy despite slow growth

‘TEMPORARY’:The Fed said US economic recovery was continuing at a moderate pace, but it slashed its GDP forecast for this year by 0.4 points to 2.7 to 2.9 percent

AFP, Washington and HONG KONG

US coins are displayed at the Money Museum in the Federal Reserve Bank of Chicago in Illinois on Wednesday.

Photo: AFP

The US Federal Reserve on Wednesday left its monetary policy unchanged, as it slashed US economic growth estimates, saying the slowdown was in part due to factors that were “likely” to be temporary.

The Federal Open Market Committee (FOMC) unanimously decided to hold its near-zero interest rate, end a US$600 billion bond-buying program by Thursday next week and continue to reinvest its principal payments from security holdings.

“The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee expected,” the policy-setting FOMC said in a statement after a two-day meeting.

The slowdown “in part” was due to “factors that are likely to be temporary,” such as higher food and energy prices which were crimping consumer purchasing power and supply chain disruptions related to Japan’s March earthquake and tsunami disaster, the committee said.

The Fed slashed its GDP growth estimate for this year to a range of 2.7 percent to 2.9 percent, from its April projection of 3.1 percent to 3.3 percent.

It also lowered its forecast for next year to 3.3 percent to 3.7 percent, from its April forecast of 3.5 percent to 4.2 percent.

Asian shares mostly edged down yesterday as traders cashed in after a two-day regional rally, while sentiment was also dampened by the Fed’s decision to cut its US growth forecast.

Tokyo lost 0.34 percent, or 32.69 points, to end at 9,596.74. Seoul closed 0.39 percent, or 8.04 points, lower at 2,055.86.

Sydney fell 0.71 percent, or 32.1 points, to 4,500.5, and Taipei dropped 0.62 percent, or 53.76 points, to 8,567.28.

However, Hong Kong was flat and Shanghai gained 0.26 percent in afternoon trade.

US Federal Reserve Chairman Ben Bernanke said the key reasons for keeping monetary policy loose were “the ongoing labor market slack” and “the subdued inflation outlook.”

The Fed has additional “untested” tools available to ease monetary policy further if conditions worsen, including increasing securities purchases or giving a fixed date for the next rate hike, but “none of them are without risks or costs,” Bernanke said at a post-FOMC news conference.

The central bank held its target federal funds rate between zero and 0.25 percent, where it has been since December 2008, in an effort to stimulate growth after a financial sector meltdown.

For the 22nd consecutive meeting, Fed policymakers said it would likely remain exceptionally low “for an extended period.”

The Fed expressed concern about rising unemployment, which hit a rate of 9.1 percent last month.

“We expect the unemployment rate to continue to decline, but the pace of progress remains frustratingly slow,” Bernanke said.

The Fed’s latest economic projections indicated little relief was on the way in the jobs market. This year’s unemployment rate was now estimated between 8.6 percent and 8.9 percent, up 0.2 point from the April estimate.

The central bank maintained a benign view on a recent pickup in inflation, saying longer-term inflation expectations had remained stable.

However, Bernanke stressed the difficulty of making accurate forecasts and acknowledged the economy is facing more long-lasting challenges to recovery.

“Maybe some of the headwinds that have been concerning us, like ... weakness in the financial sector, problems in the housing sector, balance sheets and deleveraging issues, some of these headwinds may be stronger or more persistent than we thought,” he said.

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