Federal Reserve Cuts Forecast For US Economic Growth

Posted by on Jun 21, 2012 | Comments Off on Federal Reserve Cuts Forecast For US Economic Growth

 

The Federal Reserve has cut its forecast for economic growth in 2012 from 2.9% to 2.4%.

It has also predicted a central unemployment rate of up to 8.2%, having forecast up to 8% on 25 April.

Wall Street shares were barely moved by the decision, the yields on US government bonds were also unaffected and the dollar rose against the euro.

“The Fed extending Twist was expected,” said Fred Dickson, chief market strategist at DA Davidson and Co in Oregon.

The idea of the program is to cut the long-term cost of borrowing for businesses and households.

The programme is worth $267bn (£170bn).

In a news conference, Federal Reserve chairman Ben Bernanke said unemployment was still too high and was going down too slowly.

There was a muted response on the markets to the Federal Reserve’s borrowing decision, although much of the rally earlier in the week was attributed to hopes of more stimulus measures.

“We are prepared to take further steps if necessary to promote sustainable growth and recovery in the labour market,” he said.

The rise in the central prediction of the unemployment rate came after the jobless rate rose from 8.1% to 8.2% in April.

The Federal Reserve Monetary Policy Committee’s decision on Operation Twist was not unanimous, with one of the 12 members voting against it.

Jeffery Lacker, the president of the Richmond Regional Fed Bank, had also voted against the previous three decisions.

The central bank also extended its programme of swapping short-term bonds for long-term ones, known as Operation Twist, until the end of the year.

Operation Twist involves the Federal Reserve buying bonds that have between six and 30 years left on them and selling equal amount of bonds with less than three years left.

“The Fed was more concerned about the economy than they have been and eased by extending Operation Twist,” said Allen Sinai, chief executive of Decision Economics in New York.

“They appear to be holding more firepower in reserve in case things get worse.”

The central bank’s statement pointed out that “growth in employment has slowed in recent months, and the unemployment rate remains elevated”.

It kept interest rates unchanged at the level of zero to 0.25%.

 

“There may be some disappointment that the Fed didn’t provide any strong hints in terms of new policy announcements.”

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