Fed trims U.S. growth forecast

The U.S. Federal Reserve on Wednesday trimmed its growth forecast for the American economy.

The central bank predicted growth in the range of 2.7 to 2.9 per cent in 2011 and 3.3 to 3.7 per cent next year.

In its last forecast, in April, the Fed predicted growth in the range of 3.1 to 3.3 per cent in 2011 and 3.5 to 4.2 per cent next year.

It also forecast unemployment to stay high, averaging 8.6 to 8.9 per cent in the last quarter of 2011, compared with 8.4 to 8.7 per cent projected in April.

It estimated unemployment at the end of 2012 in a range of 7.8 per cent to 8.2 per cent. In April, it called for 7.6 to 7.9 per cent in April.

Inflation, it predicted, will grow slightly, but average 1.9 per cent long term.

At a news conference, Fed chair Ben Bernanke said some of the problems slowing the U.S. economy could persist into next year.

Bernanke said the slowdown could be due, in part, to the depressed housing market and other factors that aren't likely to fade soon.

"Maybe some of the headwinds that are concerning us, like the weakness in the financial sector, problems in the housing sector — some may be stronger and more persistent than we thought," he said.

Greek crisis very important

Bernanke also said the fiscal crisis in Greece is a very important and difficult issue and suggested the European debt crisis poses a threat to both European and global banking systems and to European unity as well.

Markets worry that concerns about a potential Greek default could spread to other European nations with heavy debt burdens, such as Ireland, Portugal, Spain and perhaps Italy. U.S. banks and the U.S. economy would be at risk, too.

When the European debt crisis first shook markets last year, the Fed renewed agreements with European central banks to supply dollars to them if they ran short. The central banks would lend the dollars to commercial banks. In return, the Fed would receive European currencies to hold until the dollars were repaid.

Earlier in the day, its monetary policy committee Wednesday said the U.S. economic recovery is continuing at a moderate pace, "though somewhat more slowly than the committee had expected."

As expected, the Fed left a key interest rate at a record low near zero and repeated its pledge to keep it there for "an extended period."

It also acknowledged the labour market has been "weaker than anticipated," but said the slower pace of the recovery reflects in part "temporary" factors, such as higher food and energy prices and business disruptions caused by the earthquake and tsunami in Japan in March.

Stimulus program to end on schedule

Despite speculation that it would signal new measures to stimulate the economy, the Fed said it would let its $600 billion US government bond-buying program end as scheduled on June 30. The program is intended to stimulate the economy by lowering rates on loans, lifting stock prices and encouraging spending.

Critics have complained that the bond purchases raised the risk of runaway inflation while doing little to boost growth. Bernanke has said that creeping inflation from higher oil and food prices is likely temporary.

When asked during the news conference about the possibility of launching a new stimulus program, Bernanke said the Fed will "review the outlook going forward," but pointed out that job creation has improved this year compared with 2010.

The Fed said it would keep its holdings of Treasury bonds at current levels. That policy is intended to keep consumer and business loan rates at low levels to stimulate spending.

Bernanke earlier in June called the U.S. recovery "frustratingly slow."

U.S. employers added only 54,000 jobs in May, the poorest showing in eight months. The unemployment rate is 9.1 per cent. Most economists have downgraded their forecasts for hiring and growth for the rest of the year. 

Many economists say the slowdown means the Fed won't start raising rates until the summer of 2012, about six months later than many thought when 2011 began.