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Fed Cites Moderate US Growth, Takes No New Action

The Federal Reserve said Wednesday that the U.S. economy is improving only moderately and still needs its support to help lower unemployment.

Ben Bernanke
Federal Reserve Chairman Ben Bernanke (Chip Somodeville, Getty Images)

The Fed took no new action after a two-day policy meeting. It wants time to assess whether the aggressive steps it launched in September will boost economic growth and job creation.

In a statement, the central bank said job growth has been slow and the unemployment rate remains elevated. It noted that consumer spending has strengthened slightly and that housing has shown further signs of improvement. But growth in business investment has slowed.

The Fed’s updated view of the economy comes less than two weeks before the U.S. presidential election, after a campaign that has focused on the state of the economy.

In its statement, the Fed noted that inflation has recently risen slightly because of higher energy prices. But it said inflation over the long run should remain mild.

The statement was approved on an 11-1 vote. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, objected for the seventh consecutive meeting. Lacker has been concerned that the Fed’s policy steps could lead to higher inflation.

Last month, the Fed began buying mortgage bonds to try to push long-term interest rates lower and make home buying more affordable. It also said it planned to keep its benchmark short-term rate near zero through mid-2015.

The unemployment rate fell in September to 7.8 percent, the first time it’s been below 8 percent since January 2009. But the economy is still growing too slowly to accelerate job growth.

The economy grew at a meager 1.3 percent annual rate in the April-June quarter. Economists think it grew slightly faster in the July-September quarter. The government will report its first estimate of third-quarter growth on Friday.

Still, many employers remain wary of hiring, in part because of tax increases and spending cuts set to kick in next year and also because of a slowing global economy.

The bond purchases the Fed launched last month are designed to lower interest rates and cause stock and home prices to rise, creating a “wealth effect.” When consumers feel wealthier, they’re typically more willing to spend, thereby boosting the economy.

Fed officials reiterated Wednesday that they intend to hold rates low even after the economic recovery has strengthened. That’s a signal that the Fed will keep intervening until the economy grows fast enough to reduce unemployment sharply.

Critics note that interest rates have already been at or near all-time lows. They worry that the Fed’s injection of steadily more money into the financial system will eventually ignite inflation or create dangerous bubbles in the prices of stocks or other assets.

Since the Fed unveiled its latest plans last month, the average rate on a 30-year fixed mortgage has touched 3.36 percent — the lowest since mortgage buyer Freddie Mac began keeping records in 1971. Cheap loans have helped lift home sales, prices and construction — key pillars of the housing market’s gradual but steady comeback.

(Copyright 2012 by The Associated Press. All Rights Reserved.)

 

 

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