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 inflation expectations which caused some jitters in financial markets.
The central bank's policy-setting committee said after a two-day meeting that it intends to complete its latest, $600 billion bond-buying program in June as scheduled and said it would not let its balance sheet run down immediately.
It repeated it planned to keep interest rates, currently near zero, extraordinarily low for an extended period.
Facing headwinds from high oil prices, the Fed said the economic recovery was proceeding at a moderate pace, a change from March when it said the economy was on firmer footing.
At a news conference, the first after a monetary policy meeting by a U.S. central bank chief, Bernanke said there was a bit less momentum in the economy, which he said may have expanded at less than a 2 percent annual rate in the first three months this year.
But he added: I would say that roughly most of the slowdown in the first quarter is viewed by the committee as being transitory.
Bernanke appeared nervous at the start of the briefing, held at the U.S. 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 as trading dried up and investors listened to central bank chief.
It's kind of a novelty, Kenneth Polcari, managing director at ICAP Equities, said from the floor of the NYSE.
The news conference was called after the Fed took stiff criticism from lawmakers and some economists over its $2 trillion stimulus program to pull the United States out of financial crisis.
GROWTH LOSING A STEP
In its latest forecasts, the Fed revised down its growth estimate for 2011 to between 3.1 percent and 3.3 percent from a January forecast of 3.4 percent to 3.9 percent.
It 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 of the nation's jobs market.
The central bank raised its estimate for 2011 inflation to a range of 2.1 percent to 2.8 percent, boosted by a surge in oil prices. However, it bumped up its core inflation forecasts only marginally to a 1.3 percent to 1.6 percent range.
The Fed expressed confidence that the jump in the cost of oil would be transitory and not spark broader inflation.
Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued, it said.
Financial markets showed some nervousness. Prices for 30-year U.S. government debt hit session lows on the Fed's inflation forecasts, while the price of gold -- a traditional inflation hedge -- hit a record high above $1,520 an ounce.
The U.S. dollar hit a fresh three-year low against six major currencies after 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.
The Fed said it will continue to reinvest proceeds from maturing securities it holds to keep its economic support in place, 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, which has been criticized for lifting oil prices, and the potential for wider inflation is becoming 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)