The Federal Reserve has grown more pessimistic about the health of the American economy, cutting its growth forecast and lifting its estimates for inflation and unemployment for the second time this year.
The moves were widely expected, but as usual the shock is in the actual confirmation.
The new forecasts and commentary knocked US markets lower with the Dow, the S&P 500 and Nasdaq all losing around 0.6%, after being up for the day until the central bank released its statement and chairman Ben Bernanke held a press conference in the mid-afternoon.
Oil and gold also eased after reasonable early gains and the US 10 year bond rate rose to 2.99%, up 0.01%.
While the Fed sees the slowdown as being temporary, many US analysts say the June quarter is likely to see growth lower than the weak 1.8% annual rate in the first three months of the year.
They saw it won’t be until much later in the year that we could see higher growth and new job gains.
At the conclusion of its latest two-day policy meeting in Washington, the central bank said that while the recovery was continuing at a moderate pace, growth was somewhat slower than expected.
It also said the jobs market was "weaker than anticipated."
All major negatives and different to the statement after the April meeting.
As a result, the Fed also left the fed funds rate, unchanged fat the range of 0% to 0.25% (it has been at that level since December, 2008).
It repeated that it believes economic conditions are likely to "warrant exceptionally low levels for the federal funds rate for an extended period," which again have been in every statement since then.
It also issued new economic projections that call for slower economic growth, higher unemployment and higher inflation in 2011 and 2012 than in its previous forecast
The Fed said it estimates that the economy will grow in the range (annual rate) of 2.7% to 2.9% in 2011, down from its April estimate of an increase of 3.1% to 3.3%.
That was the second cut to its growth projections for the US this year following Japan’s earthquake and rising energy prices.
The Fed still believes the impact of the quake/tsunami and the higher energy prices will only be temporary, but it said that in April and has now cut growth and boosted the prices and unemployment estimates.
The Fed narrowed its expected inflation rate to a range between 2.3% and 2.5%, from its prior forecast of inflation at 2.1% to 2.8%.
It is also predicting that core inflation, which excludes food and energy prices, will rise between 1.5% and 1.8%. That’s up from its earlier forecast of an increase between 1.3% and 1.6%.
The Fed estimates saw an unemployment rate of between 8.6% and 8.9%, slightly lower than the current unemployment rate of 9% in January, but higher than prior predictions. (It was 8.8% at the time of the April estimates).
Encouragingly, the Fed downplayed the chance of another downturn, saying that it "expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline."
It said household spending and business investment in equipment and software continue to expand, although the housing market remains "depressed." (That is a word it has also used frequently in the past three years).
The Fed also dismissed inflation fears voiced by some economists, saying that it believes "inflation will subside" and that "longer-term inflation expectations have remained stable."
But it did drop language in earlier statements that "measures of underlying inflation are still subdued," suggesting it is now not so certain and more concerned about the increase in core inflation readings.
While the Fed said that it would continue to monitor the situation and take action as needed, it did not reveal any additional moves to pump new money into the financial system.
It said the second round of quantitative easing ( the purchase of $US600 billion in long-term Treasuries) will end next week, on June 30.
First-quarter growth decelerated to a weak 1.8% annual rate and will be updated for a third time on Friday night, our time.
Since the Fed’s key committee last met on April 26-27, the US unemployment rate has jumped from 8.8% to 9.1%, the S&P 500 index has fallen by around 5% and manufacturing activity across the country has turned down and lost momentum.
