Fed sees economy growing, avoids new stimulus

photo_1335385274072-8-2-Quicklook.jpgFederal Reserve Chairman Ben Bernanke
AFP/Getty Images – Mark Wilson

The Federal Reserve said Wednesday it sees US growth picking up and unemployment falling by the end of the year, as it held to existing stimulus measures despite some short-term economic headwinds.

Stating “it’s still a little too premature to declare victory,” Chairman Ben Bernanke gave a slightly more upbeat view of the economy and explained the Fed’s decision to shy away from more stimulus spending.

After a two-day meeting, Fed policymakers said they expected to keep interest rates near zero until late 2014, while predicting unemployment will fall to 7.8 to 8.0 percent by the end of the year.

Unemployment stands at 8.2 percent today, the lowest rate in three years, but nearly 13 million American workers are still unemployed.

The Fed also predicted that growth will reach between 2.4 percent and 2.9 percent by year’s end, better than previously thought.

But Bernanke remained cautious and said he was poised to act if necessary, amid now-familiar concerns about the housing market, long-term unemployment and public debt.

On the debt issue Bernanke warned Congress the Fed would be unable to stem a US debt crisis if lawmakers failed to get their fiscal house in order.

Using uncharacteristically terse language, he stressed the scope of the problem and the Fed’s limited capacity to handle it.

“The size of the fiscal cliff is such that there’s I think absolutely no chance that the Federal Reserve could or would have the ability whatsoever to offset that effect on the economy,” he said at a news conference following the Federal Open Market Committee (FOMC) meeting.

The Fed’s assessment of the housing market was also mixed.

“Despite some signs of improvement, the housing sector remains depressed,” the FOMC said in a statement.

Recent housing data showed a surprise drop in new home sales in March, after an equally surprising spurt the month before.

Recent history may explain some of Bernanke’s reticence.

In recent years the US recovery has stalled heading into summer months owing to Middle East revolts, the European debt crisis and the Japanese earthquake.

With that burned into the collective conscience, US economists, policymakers and Wall Street have come to greet glimmers of positive news with a certain scepticism.

There has been “a recurring and almost maddening ‘stop-go’ pattern to this recovery — stronger pulses followed by lulls,” said Joshua Feinman, chief global economist for DB Advisors.

Against this backdrop the Fed kept in place its policy of swapping short-term bonds for those with longer-term maturities — a move that should put downward pressure on real interest rates and stimulate investment.

There was no overall change to the size of the Fed’s balance sheet, but Bernanke said more measures could come.

“We remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives,” he told reporters.

Although investors had expected little else to come from the meeting, the fact the Fed tacitly admitted the recovery is only moderate and decided to take no new measures about it initially nudged markets downward.

“There were only a few small word changes… but they were notable changes in tone,” said Michael Gapen of Barclays, referring to the March Fed statement.

“That signals to us that the Fed is not expecting to conduct further asset purchases or continue its maturity extension program beyond June.”

But the improved jobs and growth forecasts nudged markets back upward.

The Dow Jones Industrial closed up 0.69 percent, and the Nasdaq 2.3 percent, also helped by strong quarterly earnings from Apple and Boeing.

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