Business

Fed forecasts weak economy could persist into 2012

WASHINGTON | The economy’s continuing struggles aren’t just confounding ordinary Americans. They’ve also stumped the head of the Federal Reserve.

Fed Chairman Ben Bernanke said Wednesday that the central bank had been caught off guard by recent signs of deterioration in the economy. And he said the troubles could continue into next year.

“We don’t have a precise read on why this slower pace of growth is persisting,” Bernanke said. He said the weak housing market and problems in the banking system might be “more persistent than we thought.”

The Fed cut its forecast for economic growth this year to a range of 2.7 percent to 2.9 percent from an April forecast of 3.1 percent to 3.3 percent. It also cut its forecast for next year to a range of 3.3 percent to 3.7 percent from an earlier 3.5 percent to 4.2 percent. The Fed also said unemployment would stay higher than it had expected earlier.

In a policy statement issued at the end of a two-day meeting, the Fed attributed the worsening economic outlook in part to higher energy prices and the earthquake and tsunami in Japan, which slowed production of cars and other products.

But at a news conference afterward, the second of what the Fed says will be regular question-and-answer sessions with reporters, Bernanke conceded that the economy’s troubles were more puzzling and potentially more long-lasting than a pair of temporary shocks.

The stock market had been mixed for much of the day but turned lower in mid-afternoon trading as Bernanke spoke. The drop was not steep and followed four days of gains.

The Dow closed down 80.34 points, or 0.7 percent, at 12,109.67. The S 500 index fell 8.38 points, or 0.7 percent, and closed at 1,287.14. The Nasdaq fell 18.07 points, or 0.7 percent, to 2,669.19.

The Fed’s statement Wednesday 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.

Since then, the economic news has been gloomy. The government reported that 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 grow much faster in the current quarter. The economy added 54,000 jobs in May, far fewer than in the previous two months. Consumer spending has weakened, too.

The economic news is taking a political toll on President Barack Obama. For the first time this year, an Associated Press-GfK poll found that fewer than 50 percent of respondents believe Obama deserves re-election. Obama’s overall approval rating fell to 52 percent in the new poll. It had risen as high as 60 percent after the U.S. raid last month in Pakistan that killed Osama bin Laden.

The new Fed statement acknowledged a slowdown over the past two months.

“They see the weakness,” said Bruce McCain, chief investment strategist at Key Private Bank. “You can hear their concern about economic weakness despite their hope it is likely to be temporary.”

The Fed stuck to its plan to bring an end this month to a program to help the economy by buying $600 billion in government bonds. The Fed also intends to keep short-term interest rates near zero “for an extended period,” a phrase it has been using the past two years. Though the central bank noted that inflation has risen, it expects that to be temporary as well.

The Fed has kept rates ultra low since December 2008. Abandoning the promise to keep them there for an “extended period” would be viewed as a signal that the Fed is preparing to raise interest rates. Many private economists think it will be another full year before the economy has recovered enough for the Fed to do it.

Economists looking for clues to the Fed’s next move didn’t get much help Wednesday. “There’s no obvious hint of tightening here,” said Jim O’Sullivan, chief economist at MF Global. “There’s no hint of new easing.”

The bond-buying program has been controversial. Supporters say the bond purchases have kept interest rates low and encouraged spending. Low long-term rates make it easier to buy homes and cars and for companies to expand.

They also argue that those lower rates fueled a stock rally. Since Bernanke outlined plans for the program last August, the Standard Poor’s 500 index is up 24 percent. Lower rates made stocks more attractive to investors than bonds, whose yields were falling.

The average rate on a 30-year mortgage has stayed below 5 percent for all but two weeks this year and was 4.5 percent last week. But low rates haven’t helped home sales much. They fell in May to the lowest level since November.

Critics, including some Fed officials, saw things differently. They warned that by pumping so much money into the economy, the Fed increased the risks of high inflation later.


Regional movers

YRC Worldwide:

76 cents, up 10 cents

H Block: $16.06, up

6 cents

Sprint: $5.12, down

12 cents

Kansas City Southern: $55.87, down 85 cents


FedEx outlook upbeat

FedEx Corp. said it expected the global economy to hit a higher gear later this year as fuel prices retreat from three-year highs and the Japanese economy recovers. Much of the growth will be driven by China and other developing nations, but FedEx said the U.S. economy would improve as well. FedEx, the world’s second-largest package delivery company, is considered a bellwether of global economic health because it ships a wide variety of goods. FedEx said it expected the U.S. economy to grow 2.5 percent this year and 3 percent in 2012 — a bit lower than the Federal Reserve’s forecasts.

FedEx also said Wednesday that its quarterly earnings rose 33 percent, to $558 million, despite higher fuel costs. Revenue increased 12 percent, to $10.55 billion.

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