Federal Reserve Chairman Ben Bernanke signaled on Wednesday that the U.S. central bank is in no rush to scale back its support for the economy with the labor market still in a very, very deep hole.
The Fed trimmed its forecast for 2011 economic growth in a nod to a weak start to the year and bumped up its projections for inflation, which caused some jitters in financial markets.
The central bank's policy-setting committee said after a two-day meeting it will complete the purchase of $600 billion in bonds in June to support the economy's recovery, and said it would keep its balance sheet, currently at $2.67 trillion, steady for a time to ensure its support does not fade.
It also repeated it plans to keep overnight interest rates, which it has held near zero since December 2008, extraordinarily low for an extended period.
It is a relatively slow recovery, Bernanke said at a news conference, the first after a policy meeting by a Fed chief in the central bank's 97-year history. The combination of high unemployment, high gas prices and high foreclosure rates is a terrible combination. A lot of people are having a tough time.
Bernanke appeared nervous at the start of the briefing, held at the central bank's headquarters, but he relaxed as the widely watched, nearly hour-long session progressed.
A hush fell over the normally bustling floor of the New York Stock Exchange with orders drying up as investors tuned into the central bank chief. It's kind of a novelty, said Kenneth Polcari, managing director at ICAP Equities.
The news conference served multiple purposes for the Fed.
It allowed Bernanke an opportunity to push back against stiff criticism from some lawmakers, economists and foreign officials that the Fed's efforts to prop up the U.S. economy with more than $2 trillion in stimulus would spark inflation.
It was also an opportunity for Bernanke to seize control of an often very public debate among Fed officials over whether the stimulus course could backfire, providing a new tool to deliver a consensus central bank view directly to markets.
In no way did Bernanke begin laying the groundwork for a near-term reversal in monetary policy, said Michelle Girard, an economist with RBS in Stamford, Connecticut. The chairman appears watchful but comfortable with the Fed's current stance.
GROWTH LOSING A STEP
In a fresh quarterly forecast, the Fed revised down its growth estimate for 2011 to between 3.1 percent and 3.3 percent from the 3.4 percent to 3.9 percent it saw in January. It said the recovery was proceeding at a moderate pace, a shift from March when it said it was on firmer footing.
Bernanke said growth may have slowed to less than a 2 percent annual rate in the first three months of this year after a 3.1 percent advance in the fourth quarter of 2010.
But he added: I would say that roughly most of the slowdown in the first quarter is viewed by the committee as being transitory. The government releases its first estimate of first quarter GDP on Thursday.
The Fed lowered its projection for unemployment but said it would stay elevated over the central bank's three-year forecast period. The jobless rate stood at 8.8 percent in March.
The pace of improvement is still quite slow and we are digging ourselves out of a very, very deep hole, Bernanke said.
The central bank sharply raised its estimate for 2011 inflation to account for a surge in oil prices. However, it bumped up its core inflation forecasts only marginally and expressed confidence the jump in the cost of oil would not spark broader inflation.
Financial markets showed some nervousness. Prices for 30-year U.S. government debt hit session lows on the inflation forecasts, while the price of gold -- a traditional inflation hedge -- hit a record high of almost $1,530 an ounce.
The U.S. dollar reached a three-year low against six major currencies as Bernanke spoke. Stock markets, which have been pumped up by the Fed's monetary easing, rose on the expectation that the central bank's support will continue.
Interest rate futures showed traders continued to bet that the Fed would hold off on raising rates until early 2012.
CALLED OUT ON DOLLAR
Bernanke faced broad questioning, including on the falling value of the dollar, which has been undercut by the Fed's easing as other major central banks raised interest rates.
While deferring to currency policy as an issue for the Treasury Department, Bernanke said a strong, stable dollar was in the interests of the United States and the world economy.
To keep its balance sheet from shrinking, the Fed said it will continue to reinvest proceeds from maturing securities it holds, ensuring it would remain a big buyer in debt markets.
Bernanke said a decision to stop that strategy would likely be the first step of a policy tightening, although he offered no timeframe on when that might occur.
As for an increase in interest rates, he suggested that was still some months off. Extended period suggests that there would be a couple of meetings before action but unfortunately ... we don't know how quickly a response will be required.
Bernanke told a questioner that the trade-off between the benefits of extending the bond-buying program and the potential for wider inflation had become less attractive.
Inflation has been getting higher, inflation expectations are a bit higher, he said. It's not clear we can get substantial improvements in payrolls without some additional inflation risks.
(Additional reporting by Kristina Cooke and Caroline Valetkevitch; Writing by Mark Felsenthal and Glenn Somerville; Editing by Tim Ahmann and William Schomberg)