Federal Reserve lowers U.S. economic outlook for 2012
The Federal Reserve yesterday lowered the U.S. economic outlook for the remainder of 2012 as Europe’s fiscal turmoil continues to threaten the global economy.
The Federal Open Market Committee “noted that strains in global financial market associated principally with the situation in Europe continue to pose significant risks to the recovery and to further improvement in labor market conditions,” said Federal Reserve Chairman Ben Bernanke.
Although the Federal Reserve is still projecting “moderate economic growth”, unemployment rates are expected to remain above 8% this year but could eventually drop down to 7.0% to 7.7% by the fourth quarter of 2014.
The adjusted outlook reflected growing concerns over the debt crisis engulfing several European countries – namely Greece, Ireland, Portugal, and Spain.
The European Union, led by Germany, has attempted to resolve the sovereign debt crisis through a series of financial bailouts and forcing national governments to impose fiscal austerity measures, such as drastic cuts to social welfare programs, to balance their budgets.
However, the measures taken so far have prompted massive street protests and destabilized governments and have done little to bolster the faith of creditors funding these bailouts.
Continuation of the political and economic instability in Europe could bode poorly for U.S. exporters, thereby threatening the fragile economic recovery.
Bernanke also pointed out that the U.S. recovery is also hampered by a “still-depressed housing market”, difficult access to credit for some borrowers, and steep cuts to federal, state, and local budgets, leading to slower growth and smaller jobs gains.
Feds to maintain near-zero interest rates
In an effort to prevent the economy from backsliding, the Federal Reserve has decided to keep interest rates between 0% to 0.25% at least through 2014.
The Federal Reserve will also continue to purchase U.S. Treasury securities through its “Maturity Extension Program”.
Under the program, the Federal Reserve would sell shorter-term Treasury securities with maturities of three years or less and use the proceeds to buy longer-term securities with maturities of six to 30 years.
This would reduce the supply of longer-term Treasury securities and help keep interest rates low.
“The continuation of the maturity extension program will proceed at the current pace and result in the purchase, as well as the sale and redemption, of about $267 billion in Treasury securities by the end of 2012,” the Federal Reserve announced.
- WhatTheFolly.com: Transcript: Federal Reserve Chairman Ben Bernanke on U.S. economic outlook for 2012-2014
- Federal Reserve: Video of press conference with Federal Open Market Committee (FOMC) Chairman Ben Bernanke on June 20, 2012
- Federal Reserve: Federal Reserve Board and Federal Open Market Committee release economic projections from the June 19-20 FOMC meeting
- Federal Reserve Bank of New York: Statement Regarding Continuation of the Maturity Extension Program
- Federal Reserve: Maturity Extension Program and Reinvestment Policy
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