While the Fed pinned a recent slowdown in growth and quickening of inflation partly on transitory factors, Fed Chairman Ben Bernanke said some of the headwinds facing the economy could prove a lingering drag on the economy. "Part of the slowdown is temporary and part of it may be longer lasting," he told a news conference after a two-day Fed policy meeting.
The Fed said the economy should grow 2.7 to 2.9 percent this year, a forecast marked down from a 3.1 to 3.3 percent April projection. It said it sees 2012 growth in a 3.3 to 3.7 percent range, also lower than its previous forecast. In a policy statement, the central bank said a jump in commodity prices and supply-chain disruptions from Japan's devastating earthquake had both weighed on growth and pushed up prices, but that those factors should dissipate over time.
As widely expected, the Fed said it will maintain interest rates at exceptionally low levels for an extended period. It also confirmed it was ending its $600 billion bond-buying programme at the end of the month, while reiterating that it will continue to reinvest principal payments from its holdings. The Federal Reserve said Wednesday it would again maintain its key interest rate near zero, citing concerns over the unexpectedly sluggish US economic recovery.
"The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee expected," the policy-setting Federal Open Market Committee said after a two-day meeting. But the slowdown was mainly due to factors that probably would be temporary such as higher energy prices, it said.
The central bank unanimously decided to keep its key target interest rate between zero and 0.25 percent where it has been since December 2008 in an effort to boost economic growth. "There are no hints of further easing from the Fed," said Nick Bennenbroek, head of G20 forex strategy at Wells Fargo in New York. "The statement overall disappointed investors looking for more bearish language and that's why we are seeing the dollar rally a little bit."
In a wide-ranging discussion that touched on issues as diverse as Greece's economic woes and the size of reserves that big banks should hold, Bernanke conceded that US hopes were partly hostage to events in Europe. "If there were a failure to resolve that (Greek debt) situation it would pose threats to the European financial system, the global financial system, and to European political unity," he said. "So yes, we did discuss it and it is one of several potential financial risks that we are facing now."
Two years after the end of the US recession, the recovery looks disappointingly weak. While Fed officials have persistently said they expect growth to accelerate, reports since the Fed's April meeting show a clear loss of momentum in the world's largest economy. Employers have been reluctant to hire and the jobless rate remains stubbornly high, climbing to 9.1 percent in May.