Federal Reserve Cuts Back U.S. Growth Forecast
ROBERT SIEGEL, HOST:
From NPR News, this ALL THINGS CONSIDERED. I'm Robert Siegel in Washington, D.C.
MELISSA BLOCK, HOST:
And I'm Melissa Block at NPR West in Culver City, California. Today from Federal Reserve, another downbeat assessment of the economy. After two days of meetings, Fed policymakers cut their forecasts for growth over the next three years, and they said unemployment would be higher than they previously thought. But as NPR's John Ydstie reports, the sputtering economy only prompted a modest response from the Fed, the extension of a program known as Operation Twist.
JOHN YDSTIE, BYLINE: Fed officials cut their forecasts for economic growth for this year from around 2.5 percent back to about 2 percent. They said unemployment is likely to remain just above 8 percent. To counteract the slide, Fed officials said they will extend Operation Twist, a program designed to push long-term interest rates lower. Here's out it works: The Feds sells short-term securities that it owns and uses the money to buy long-term securities, like 10-year and 30-year Treasury bonds. The result is downward pressure on long-term interest rates, which can help both businesses and households, like those buying a home or refinancing a mortgage. In a post-meeting news conference, Fed Chairman Ben Bernanke said it's a substantive step.
BEN BERNANKE: ...which will provide additional accommodation for the economy, and moreover, we have stated that we're prepared to take further steps if necessary to promote sustainable growth and recovery in the labor market.
YDSTIE: But some analysts were disappointed that given sluggish growth and the turmoil in Europe, that the Fed didn't take stronger action. Specifically, there were some calls for a third round of quantitative easing, which would inject massive amounts of money into the economy through bond purchases. Bernanke was asked why the disappointing job growth recently hadn't triggered a bigger Fed response. He responded this way.
BERNANKE: Unemployment is still too high, but it has come down. It was about 10 percent at the peak and now it's closer to 8 percent. It's going down too slowly, but it is going down. You know, as I said and as the statement says, if we don't see continued improvement in the labor market, we'll be prepared to take additional steps as appropriate.
YDSTIE: Bernanke also defended the Fed against criticism that its policies aren't helping average Americans because banks are only giving loans to those with very high credit scores.
BERNANKE: I don't think it's at all accurate to say that Federal Reserve policy is not helping the broad public. First of all, many Americans are able to take advantage of lower interest rates. Many people have refinanced or bought homes. Others have taken out loans to buy cars. Auto loans are cheap and broadly available.
YDSTIE: And the Fed chairman said low rates have enticed many businesses to borrow and buy machinery and equipment, which has created jobs at firms producing those things. Bernanke said among the forces slowing employment growth are cutbacks at state and local governments. They have led to a loss of over 650,000 jobs in the past few years. The Fed chairman said job growth may already be suffering from concern about damage to the economy from the so-called fiscal cliff at the end of this year, the expiration of the Bush tax cuts and payroll tax break and automatic federal spending cuts.
BERNANKE: We heard anecdotes today in the meeting about firms that might be government contractors that were, you know, not sure about whether the contracts would still be in place come January and making employment decisions based on that. More generally, financial markets don't like uncertainty and particularly, uncertainty of this magnitude and that, I think, will be a negative.
YDSTIE: The Fed chairman said the situation in Europe is also a drag on the U.S. and global economies. He said U.S. banks are now better prepared for a potential meltdown in Europe. He also said Europe is a wealthy area with the resources to solve its problems, and he said European leaders are committed to do so because preserving the euro area is in their interest. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.