Federal Reserve Chairman Ben Bernanke said at an historic press conference Wednesday he expects the economy to continue growing through next year and 2013.
The central bank at the same time released a forecast showing officials are more upbeat about the prospects for employment for the rest of this year but foresee higher inflation than they did at the start of the year.
It's the first time in the Fed's 97-year history that a sitting Fed chief held a regularly scheduled news conference on monetary policy.
In an updated forecast, the Fed projects the economy will grow between 3.1 percent and 3.3 percent this year. That's a downward revision from their last forecast, which saw growth possibly as high as 3.9 percent this year. The new forecast reflects slower growth in the first three months of this year because of higher energy costs.
"I would say that roughly that most of the slowdown in the first quarter is viewed by the committee as being transitory. That being said, we have taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy," Bernanke said.
The Fed's latest outlook foresees lower unemployment than was expected in January. The unemployment rate, which stood at 9.8 percent in November, has fallen to 8.8 percent. The Fed's new forecast projects the unemployment rate will fall to between 8.4 percent and 8.7 percent by the end of the year.
Document: Economic projections of Federal Reserve (.pdf file)
Some of Bernanke's answers from the press conference:
- On jobs: "It's not clear that we can get substantial improvements in payrolls without some additional inflation risks, and in my view we can't achieve a sustainable recovery without keeping inflation under control."
- On gas prices: "Our view is gas prices will not continue to rise at their recent pace. As they stabilize and even come down as the situation stabilizes in the Middle East, that will provide some relief on the inflation front, but we will have to watch it very carefully."
- On the dollar: "The best thing we can do to create strong fundamentals for the dollar in the medium term is to first keep inflation low, which maintains the buying power of the dollar, and second, to maintain a strong economy."
- On zero inflation: "Attempting to maintain inflation at zero will increase the risk of experiencing an extended bout of deflation or falling wages and prices, which in turn can lead employment to fall below its maximum sustainable level for a protracted period. The goal of zero inflation is not consistent with the Federal Reserve's dual mandate."
Toward the end of the event, Bernanke said he was "confident in long run that the U.S. will return to being most productive, one of fastest growing, dynamic economies" in the world.
"He did make two interesting comments. He hinted that he would like to continue the quantitative easing program but said the trade-offs were less attractive because inflation is higher. And the second one, which is more important from an operational standpoint, is that the first step in a tightening process would be a passive shrinking of the balance sheet by letting maturing securities roll off," said Cary Leahey, managing director and senior economist at Decision Economics.
"You can't give him a grade lower than an A-. It's not like we're watching Mr, Excitement," he said of Bernanke's presentation.
Stocks rose after Bernanke said he expects the economy to continue growing. The Dow Jones industrial average, which was up about 50 points when Bernanke began speaking, gained another 50 points half an hour before the market closed.
Earlier in the day, the Fed it plans to keep interest rates low for an extended period to aid an economic recovery it described as "moderate." Elaborating to start the press conference, Bernanke suggested it would be at least two more Fed meetings before rates would change.
Ending a two-day meeting Wednesday, the Fed made no changes to a $600 billion bond-buying program aimed at boosting the economy by injecting money into the banking system. The decision was unanimous. The bond purchases were intended to lower loan rates, encouraging spending and boost stock prices. But critics have worried that the purchases would feed inflation.
The Fed downplayed inflation risks. It acknowledged a spike in oil prices, but concluded the pickup in inflation will be temporary.
As it winds down stimulus, the Fed is now shifting its focus on when and how it should start boosting interest rates to prevent inflation from getting out of control. Economists think the Fed will start raising rates later this year or early next year. Higher rates would reduce borrowing and spending and make companies less inclined to boost prices.
The Fed is lagging other central banks in tightening financial conditions. The European Central Bank raised benchmark rates earlier this month and China has also taken steps to cool its economy.
The out-of-step U.S. monetary policy has undercut the dollar, which slid to a three-year low against a broad basket of currencies on Wednesday. Analysts expect the greenback to remain under pressure.
The Fed chopped benchmark short-term rates to near zero in December 2008 and then bought $1.4 trillion in longer-term mortgage-related debt and Treasury securities to pull the economy out of a deep recession.
When the recovery flagged last year, the Fed launched its latest round of bond buying.
Fed officials known to voice consensus views — such as Vice Chair Janet Yellen and New York Fed President William Dudley — have defended the monetary support as important for an economy with unemployment at 8.8 percent.
Soft U.S. economic growth in the first quarter has offered a cautionary note for Fed officials, who will want to make sure the economy is on solid ground before pulling back on their stimulus.
A government report on Wednesday showed stronger-than-expected orders for long-lasting manufactured goods, a sign the factory sector continues to underpin the recovery.
While Bernanke is unlikely to offer any timeline for rate hikes, he might provide insights into the latest thinking at the Fed on how officials will go about tightening policy.
Some economists believe that the Fed statement signaled that when its current bond-buying program, known as QE2 (for quantitative easing), ends, there will be no QE3.
"The latest FOMC statement makes only subtle changes to that released on March 15, but sounds a little more concerned about rising inflation but a little less positive on growth, and makes it clear QE2 will be completed at the end of this quarter, thus no tapering into QE3," said David Sloan, and economist at IFR Economics, which is a unit of Thomson Reuters.
Full text of the Fed statement
Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
