Fed to end bond buys despite lag in economy

6/23/2011

WASHINGTON -- The Federal Reserve acknowledged Wednesday that the economy is growing more slowly than it expected. But it said it will complete its $600 billion Treasury bond buying program by June 30 as planned and announced no further efforts to boost the economy.

Ending a two-day meeting, the Fed repeated a pledge to keep interest rates at record lows near zero for "an extended period," a promise it's made for more than two years.

Fed officials said in a statement that they think the main causes of the economy's slowdown, such as high gas prices and supply disruptions from Japan's disasters, are temporary. Once those problems subside, Fed officials said the economy should rebound.

But at a news conference after the statement was released, Federal Reserve Chairman Ben Bernanke acknowledged that some of the problems slowing the economy could persist into next year.

"Maybe some of the headwinds that are concerning us, like weakness in the financial sector, problems in the housing sector … some of these headwinds may be stronger and more persistent that we thought," Mr. Bernanke said. He was responding to a question about whether more permanent factors had led to the dimmer outlook.

Stocks, which had been mixed most of the day, began to slide around 2:30 p.m. That was when Mr. Bernanke acknowledged that some of the problems affecting the economy may go beyond temporary factors.

The Dow Jones industrial average closed down 80 points for the day. All losses occurred in the final 90 minutes of trading.

The Fed also offered its latest forecast for the economy. It predicts the economy will grow between 2.7 percent and 2.9 percent this year. That's down from its April estimate of between 3.1 percent and 3.3 percent.

Growth at the rate the Fed is projecting won't be enough to significantly lower unemployment, now at 9.1 percent. The Fed estimates unemployment still will be around 8.6 percent to 8.9 percent by the end of the year.

The Fed's statement and updated forecasts stood in contrast to its more upbeat view when officials last met eight weeks ago. At that time, the central bank said the job market was gradually improving.

Mr. Bernanke and his colleagues are trying to keep a fragile economy on track two years after the Great Recession officially ended.

A spike in gasoline prices earlier this year made consumers and businesses more cautious about spending. Consumer spending drives about 70 percent of the economy.

The economy grew at an annual rate of only 1.8 percent in the first three months of the year. It isn't expected to be much higher in the current quarter.

Beyond high gas prices and supply disruptions caused by the earthquake and tsunami in Japan, the Fed is now facing a new problem: renewed jitters that a debt crisis in Greece could spread to other heavily indebted European nations and send shock waves through global financial markets.