Fed says US economy has slowed, takes no new steps

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By MARTIN CRUTSINGER, Associated Press

WASHINGTON (AP) — The Federal Reserve said Wednesday that the U.S. economy is losing strength and repeated a pledge to take further steps to stimulate growth if the job market doesn't show sustained improvement.

The Fed took no new action after a two-day policy meeting. But it acknowledged in a statement released after the meeting that economic activity had slowed over the first half of the year. It also said unemployment remains elevated and consumer spending is rising at a somewhat slower pace.

Stocks indexes turned slightly lower after the Fed didn't announce any new measures to stimulate the economy. The Dow Jones industrial average was down 30 points shortly after the Fed's announcement at 2:15 p.m. It was up 20 points immediately before.

The yield on the 10-year Treasury note increased to 1.52 percent after the Fed's statement was released.

The statement was nearly identical to the one issued after the Fed's June meeting, expect for language noting slower growth. The Fed repeated that strains in the global market pose a significant risk to the U.S. economy, the housing market is improving but remains depressed and inflation remains tame.

Policymakers also repeated their plan to hold short-term interest rates at record-low levels until at least late 2014.

Most economists say the Fed could launch another program of buying government bonds and mortgage-backed securities at its September meeting if the economy doesn't show improvement. The goal of the program would be to drive long-term rates, which are already at record lows, even lower.

Economists will eagerly await what Chairman Ben Bernanke's has to say at an annual economic conference later this month in Jackson Hole, Wyo.

"The Fed took no action at this meeting but strongly hinted that there will be further easing action at the next meeting in September," said David Jones, chief economist at DMJ Advisors.

Jones noted that in its pledge to provide further support, the Fed changed the phrasing to say the central bank "will provide additional accommodation as needed to promote a stronger economic recovery." In the previous statement in June, the central bank simply said that it "is prepared" to take further action.

The statement was approved on an 11-1 vote. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented for a fifth time this year. He objected to the Fed including language in the statement about keeping short-term rates low until late 2014.

U.S. economic growth slowed to an annual rate of just 1.5 percent from April through June, down from a 2 percent pace in the first quarter.

Fed officials have signaled in speeches their concern about job growth and consumer spending. Bernanke told Congress last month that the Fed is prepared to take further action if unemployment stays high.

Worries have also intensified the U.S. economy will fall off a "fiscal cliff" at the end of the year. That's when tax increases and deep spending cuts will take effect unless Congress reaches a budget deal.

Economists also worry that the debt crisis in Europe could intensify. Borrowing costs are too high for many governments, including Spain and Italy, and growth is slowing across the region as the effects of budget-cutting take hold.

Unemployment hit a record 11.2 percent in June for the 17 countries that use the euro currency.

The European Central Bank holds a policy meeting Thursday and expectations are rising that it could try to jolt the region's financial system through bond purchases or other measures.

The U.S. Labor Department releases the July jobs report on Friday. Economists forecast that U.S. employers added 100,000 jobs in July. That would be only slightly better than the 75,000 a month from April through June and still down from a healthy 226,000 average in the first three months of the year. The unemployment rate is expected to stay at 8.2 percent.

The Fed has already pursued two rounds of purchases of Treasury bonds and mortgage-backed securities.

The Fed has also extended a program called Operation Twist. Under this program, the Fed sells short-term Treasurys and buys longer-term Treasurys. The goal is to lower longer-term interest rates.

Even if the Fed launched a third round of bond purchases, few think that further lowering long-term rates would provide much benefit to the U.S. economy. Most businesses and consumers who aren't borrowing now aren't likely to change their minds if rates slipped a bit more.

The yield on the benchmark 10-year Treasury note is already just above its record low of 1.39 percent, which it touched last week. The national average rate for a new-car loan barely tops 3 percent. And the average on a 30-year fixed-rate mortgage fell below 3.5 percent last week for the first time on records dating back 60 years.

Some regional Fed bank presidents have expressed concern that expanding the Fed's investment portfolio beyond its current record $2.9 trillion to try to lower rates more would heighten the risk of high inflation later.

Some analysts have also suggested that the Fed might be reluctant to act aggressively as the November election nears, out of concern it could be seen as affecting the vote.

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