Fed foresees weaker growth

WASHINGTON -- The Federal Reserve sketched a bleaker outlook Wednesday for the economy, which it thinks will grow much more slowly and face higher unemployment than it had estimated in June.

The Fed's gloomier forecast shows that the recovery from the recession has continued to fall short of expectations. Some economists said it makes the Fed more likely to act further to try to boost the economy, though probably not until early next year.

One option would be a program similar to the Fed's $600 billion in Treasury bond purchases, which it completed in June. Some economists think the Fed could buy mortgage-backed securities instead, which could more directly support the depressed housing market by lowering loan rates.

Speaking at a news conference Wednesday, chairman Ben Bernanke said that if conditions worsen, the Fed would consider buying more mortgage-backed securities. He declined to specify what would trigger such a move.

"Bernanke did not go out of his way to dampen growing expectations" that another round of purchases is coming, said Dana Saporta, an economist at Credit Suisse. "If anything, he stoked those expectations."

Still, a more aggressive effort to boost the economy would likely face resistance within the Fed. Ian Shepherdson of High Frequency Economics said the economy would have to deteriorate before the Fed would launch another round of purchases.

The Fed now predicts the economy will grow no more than 1.7 percent for 2011. For 2012, it foresees growth of about 2.7 percent. Both forecasts are roughly a full percentage point lower than its June forecast.

The Fed sees unemployment averaging 8.6 percent by the end of next year. In June, it had predicted unemployment would drop next year to as low as 7.8 percent. The rate is now 9.1 percent.

The Fed's gloomier outlook is similar to many private economists' forecasts. Bank of America Merrill Lynch, for example, expects only 1.8 percent economic growth this year and 2.1 percent in 2012.

Those growth rates are far too low to drive down unemployment.

At his news conference, his third this year, Bernanke acknowledged that the pace of growth will likely remain "frustratingly slow."

"We remain prepared to take action as appropriate to make sure the recovery continues," he said.

Even so, the Fed said the economy had improved since nearly stalling in the spring. As a result, it's putting off any new actions so it can gauge the impact of steps it's already taken.

Fed policymakers made the announcement after a two-day meeting.

In a statement, the officials said consumers have stepped up spending. Still, they said the economy continues to face significant risks, including the debt crisis and risk of recession in Europe.

At his news conference, Bernanke cited Europe's debt crisis as a particular concern. He said the crisis could threaten confidence and hold back growth.

The vote on the Fed's policy statement was 9-1. Charles Evans, the president of the Chicago Federal Reserve Bank, dissented. The statement said Evans wanted to take stronger action to try to boost the economy.

The vote was a shift from the previous two Fed meetings, when three members had dissented for the opposite reason: They opposed the Fed's continued efforts to keep rates at super-lows, for fear it could ignite inflation. Those three members, known as inflation "hawks," dropped their opposition this time.

"The view of the hawks is that once the decision has been made by the majority, it just causes confusion if they continue to vote to roll back action that has already been taken," said Paul Ashworth, chief U.S. economist at Capital Economics.

Some analysts said they expected the Fed to take further action to support the economy at coming meetings, given their expectation that growth will remain sub-par.

"Policymakers are keeping the door open because the unemployment rate remains high, and there are clear downside risks from the economic situation in Europe," said Sal Guatieri, senior economist at BMO Capital Markets.

After their September meeting, the policymakers said they would shuffle the Fed's investment portfolio to try to further reduce long-term interest rates. And in their previous meeting in August, they had said they plan to keep short-term rates near zero until at least mid-2013, unless the economy improved.

The Fed repeated the mid-2013 target in its statement Wednesday. It also said it was continuing its program to rebalance its portfolio to try to lower long-term rates.

The Fed has kept its key short-term interest rate at a record low since December 2008. This is the rate that banks charge on overnight loans. It serves as the benchmark for millions of business and consumer loans.

The Fed noted that growth strengthened over the summer, in part because temporary factors that had weighed on the economy in the spring had eased. Consumers are able to spend a little more because gas prices have declined from their May peak of roughly $4 a gallon. And auto sales and production have picked up now that supply chains disrupted by the March earthquake in Japan are flowing more freely.

But the Fed said the job market remains weak. And it suggested that the troubles in Europe could hurt U.S. growth.

The Greek prime minister's surprise move to call a referendum on the country's latest rescue plan sparked fears that the debt deal could unravel, that Greece could default on its debt and that the crisis could infect the global financial system.

Even if Europe dodges a financial catastrophe, many economists think it's headed for a recession that would affect the U.S. and global economies. The Fed expressed such concerns after its August meeting.

Still, the Fed remains deeply divided over what, if any, action to take next.

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AP Economics Writer Daniel Wagner contributed to this report.