U.S. Fed lowers 2011 economic growth forecast

08:49, April 28, 2011      

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The U.S. economy is expected to grow between 3.1 percent and 3.3 percent this year, a downward revision from the previous forecast which saw growth possibly as high as 3.9 percent, said Ben Bernanke, chairman of the Federal Reserve, on Wednesday.

ECONOMIC SITUATION

Growth would be "a relatively weak number" in the first quarter, which reflects the rising oil and food prices, Bernanke said at a historic press conference after the meeting of the Federal Open Market Committee (FOMC), the interest rate policymaking body of the central bank.

It is the first time in the history of the 98-year-old central bank that a chairman has begun holding regular press conference. It is seen as the Fed's response to the criticism that its monetary policymaking process is not transparent enough.

But the slowdown in the first quarter is viewed as "transitory, " Bernanke said.

In an updated forecast released on Wednesday, the Fed also downwardly revised its expectation for the U.S. growth in 2012 from 3.5-4.4 percent, as announced in January, to 3.5-4.2 percent. Longer run economic outlook is forecast to remain unchanged.

Bernanke noted that the U.S. labor market is "improving gradually." Unemployment rate, currently at 8.8 percent, is projected to fall to the range of 8.4-8.7 percent at the end of this year. The Fed previously expected the figure to be at 8.8-9.0 percent in its January forecast.

The price index for personal consumption expenditures (PCE), the indicator to measure inflation, is projected to grow at the range of 2.1-2.8 percent. That is much higher than the Fed's January forecast of 1.3-1.7 percent.

For the core inflation, which excludes volatile food and fuel prices, the Fed sees a 1.3-1.6 percent increase in 2011. That is slightly higher than January's forecast of 1.0-1.3 percent.

Core inflation expectation remains stable and within the Fed's ideal range of below 2 percent, according to Bernanke.

KEY CONCERNS

Although the core and longer-term inflation expectations remain low, inflation factor has become a key concern of the Federal Reserve.

The central bank said that "commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March."

The Fed will pay "close attention" to the evolution of inflation and the inflation expectation.

The Fed also noted that the housing market remains in trouble.

"Investment in nonresidential structures is still weak, and the housing sector continues to be depressed," it said.

Moreover, the Fed chief warned of the U.S. debt challenge, which is also weakening the U.S. dollar's global status.

Bernanke told reporters that the country faces a huge problem in its massive debt load.

"It's the most important economic problem, at least in the longer term, that the United States faces," he said.

While answering a question, Bernanke affirmed that "a strong and stable dollar" is in the interest of the United States.

That statement echoed Treasury Secretary Timothy Geithner's remarks on Tuesday.

"We will never embrace a strategy to weaken the dollar," Geithner said at a conference organized by the Council of Foreign Relations. "Our policy has been and will always be, as long as I will be in office, that a strong dollar is in the interest of the country."

It was the first time this year that Geithner had publicly proclaimed a strong-dollar policy.

The dollar has been losing its value since the outbreak of the financial crisis in the fall of 2008. The currency has weakened about 6.5 percent against a basket of major currencies since the beginning of this year.

POLICY REACTION

Facing enormous criticism, Bernanke said that the Fed's super ease monetary policy to tackle the financial crisis and boost economic recovery is "successful." He did not specify on when the central bank will tighten the interest rate policy, but said it will depend on inflation and economic growth in coming months to change its current policy.

He reiterated the Fed's dual mandate -- to foster economic growth and keep stable prices, adding that the Fed's top priority is to get stronger recovery and full employment.

In a unanimous decision, the Fed said it was maintaining the pace of its Treasury bond purchase program launched last November to help the economy grow more strongly and to lower unemployment.

It "will complete purchases of 600 billion dollars of longer- term Treasury securities by the end of the current quarter," noted the central bank.

It also decided to keep the federal funds rate at the historically low level of zero to 0.25 percent "for an extended period."

Many economists criticized that the U.S. government and the Federal Reserve have implemented policies that caused higher inflation pressure around the world. A weaker dollar helps U.S. exporters to sell goods and products across the world, and at the same time eases the country's fiscal pressure arising from a record high level of deficit.

In order to fulfill its mandate, the Fed would rather "err on the easing side," Carmen Reinhart, a senior fellow of the Washington-based think tank Perterson Institute for International Economics, told Xinhua.

Source: Xinhua
 
 
     
 
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