US Federal Reserve cuts economic growth forecast

  • 27 April 2011
  • From the section Business
Media captionBen Bernanke says debt levels are "the most important long-term economic problem facing the US"

The US Federal Reserve has cut its economic growth forecast for this year, citing weaker growth than expected in the first three months of the year.

Chairman Ben Bernanke said he expected growth for 2011 to be between 3.1% and 3.3%, compared with the previous forecast of 3.4% to 3.9%.

He also hinted the Fed would not pump more money into the economy after June.

Mr Bernanke also called on the government to tackle the country's "very serious" debt problems.

At his first press conference, the world's most powerful central banker also lowered the Fed's unemployment rate forecast for this year, to between 8.4% and 8.7% from 8.8% to 9%.

But he raised significantly its inflation forecast to between 2.1% and 2.8% from 1.3% to 1.7%.

Mr Bernanke said annual growth would be lower largely due to weaker first quarter growth, which would probably be under an annualised rate of 2% due to lower defence spending, weaker exports, a weak construction sector and bad weather.

The January-to-March GDP figures are published on Thursday.

Apart from construction, these were all "transitory" factors, he said, which meant the Fed's longer-term growth projection remained unchanged at between 2.5% and 2.8%.

Mr Bernanke's comments and performance were generally well-received by the markets, with the Dow Jones index closing up 95.6 points, or 0.8%, to 12,690.96.

Monetary stimulus

Earlier, the Fed kept interest rates at between zero and 0.25%.

It also said it would continue with its monetary stimulus policy, known as quantitative easing, and would complete its second round of purchases totalling $600bn (£363bn) as scheduled by the end of June.

Mr Bernanke said the end of this stimulus was "unlikely to have a significant effect on financial markets or the economy".

This was because the move has been well flagged, and because the overall stock of assets held by the Fed would remain the same - it would continue reinvesting maturing assets.

He said a fresh round of stimulus was looking less attractive given the recent rise in inflation.

He refused to give any indication of when the Fed would actually start its exit strategy from quantitative easing, which would effectively involve stopping reinvesting its maturing assets.

'Top priority'

Mr Bernanke gave strong views on what he called the country's high debt levels - what he called "the most important long-term economic problem facing the US".

He said the current deficit was not sustainable, and had "significant consequences for economic growth and our standard of living".

He added that addressing the long-term deficit should be the "top priority" for the government.

Mr Bernanke was addressing a question about the recent move by international ratings agency Standard & Poor's to put the US on a negative outlook.

The agency said the US could lose its top-level credit rating due to the lack of a plan to bring down its growing deficit and tackle its debt.

Open discussion

Despite reducing the Fed's unemployment forecast, the chairman said the jobless rate was falling at a relatively slow rate due to modest economic growth.

The labour market, he said, was "not in good shape" and long-term unemployment was "a significant concern".

He said the high unemployment rate, currently 8.8%, was one of the main reasons for having "highly accommodative monetary policy", by which he meant record low interest rates and monetary stimulus.

He also said inflation, which jumped to 2.7% last month, was being boosted by high commodity prices, but said he remained confident that underlying inflation remained stable.

He admitted, however, that there was not much the Fed could do about rising oil prices, hence raising the inflation forecast for this year.

The introduction of regular press conferences by the chairman of the Fed is seen as a way for the bank to explain its decisions and address criticisms of its handling of the financial crisis, and even its inability to prevent it in the first place.

Mr Bernanke said the conferences were part of a wider move by the Fed to become more transparent.

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