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Fed Slashes Economic Outlook, Keeps Door Open for Action Fed Slashes Economic Outlook, Keeps Door Open for Action

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ECONOMY

Fed Slashes Economic Outlook, Keeps Door Open for Action

The Federal Reserve slashed projections for U.S. economic growth and held the door open to new monetary policy action in the face of a euro-zone debt crisis, stubbornly high unemployment and a weak U.S. housing market.

The central bank took no new policy action on Wednesday, noting recent and modestly positive data -- stronger third-quarter growth, rising household spending and an expansion in business investment. 

 

But the Federal Open Market Committee, after a two-day meeting, said it saw significant risks to the U.S. economy from strains in global financial markets. While the central bank did not specifically reference the euro-zone debt crisis, financial markets have shifted wildly as Greece decides whether to accept a bailout offer.

Nomura Global Economics senior U.S. economist Ellen Zentner said recent events in Europe likely prompted the central bank to keep its view of “significant downside risks” to the U.S. outlook.

"Over the last 48 hours, we’ve been trying to assess just what’s been going on in Greece, which is just so confusing, and I think that that prompted the Fed to leave that ‘significant’, the word 'significant’, when assessing the downside risks in there in this statement," Zentner said, noting that until Greece called for a risky referendum on the European bailout offer, Nomura thought the Fed would remove "significant" from the statement.

 

The Fed also significantly revised down its projections for economic growth, pegging real GDP growth at just 1.6 percent to 1.7 percent in 2011, down a full point from its June projection of stronger 2.7 percent to 2.9 percent. According to its updated outlook, the Fed does not expect unemployment to decline to 7 percent before 2013. Inflation expectations were largely unchanged.

The FOMC pledged to stay on track with its last two policy initiatives, announced in August and September. The Fed will shift the balance of its bond portfolio in an effort to drive down long-term interest rates and will keep the federal funds rate at rock-bottom levels through mid-2013.

Chicago Fed President Charles Evans was the lone dissenter, asking for additional policy accommodation. That change was the most surprising part of the FOMC statement, according to Michael Hanson, senior economist at Bank of America-Merrill Lynch.

FOMC members Richard Fisher, Narayana Kocherlakota, and Charles Plosser dissented on the Fed’s last two policy moves, but not on the most recent statement. The agreement may be tied to the significantly lower outlook for the U.S. economy, Hanson said.

 

Economists did not expect new policy initiatives but said they anticipated some discussion of shifting the Fed’s communications policy to provide more certainty to markets. Fed Chairman Ben Bernanke will likely face questions on the Fed’s communications policy and other issues in a press conference on Wednesday afternoon.

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