By Peter Schroeder - 01/25/12 09:00 PM EST
The Federal Reserve threw cold water on growing hopes that the economic recovery might be gaining momentum, indicating Wednesday that it expects the economy to take longer to get back on its feet.
The policy-setting arm of the central bank announced that it was pushing back, by a year and a half, how long it expects the economy to take before interest rates need to be increased from their near-zero levels. The Fed now expects it will keep those bottom-barrel rates until the end of 2014, up from the mid-2013 expectation of last year, as it struggles to “support a stronger economic recovery.”
But Federal Reserve Chairman Ben Bernanke said the economic recovery remained “fragile” and had a long way to go.
“I don’t think we’re ready to declare that we’ve entered into a new, stronger phase at this point,” he told reporters following the statement’s release.
Bernanke said there were “no doubt” indications the economy was improving, but he noted that a number of challenges remained. Retail sales from the recent holiday season were somewhat disappointing, and “headwinds emanating from Europe” are contributing to an overall global economic slowdown that is weighing on America.
“The Fed is not quite buying into this idea of the recovery,” said Brian Gardner, the senior vice president for Washington research at Keefe, Bruyette and Woods. “What they’re saying is, we think the economy’s going to be in rough shape for a while.”
In addition to expanding its horizon for near-zero rates, the Fed trimmed its expectations for economic growth in the coming years. FOMC members now expect the economy to grow 2.2 to 2.7 percent in 2012, down from the 2.5 to 2.9 percent anticipated in November.
That dimmed outlook will not be welcome news for the White House, as the president is hoping to have a surging economy in his sails for his reelection campaign. During Tuesday’s State of the Union address, the president touted his plan to keep the economy growing.
Given the Fed’s gloomier outlook, the central bank might be looking for other ways to help push the economy along. Bernanke said the Fed was prepared to take further action to help the economy, if needed, including a third round of “quantitative easing.” Republicans have been fiercely critical of the last two rounds of major bond buying the Fed has undertaken in an effort to spur lending, but Bernanke showed no signs of backing away from the tactic Wednesday.
“We are prepared to take further steps … if we see the recovery is faltering,” he said. “It’s an option that’s certainly on the table.”
While more pessimistic on the overall economy, the central bank does seem to be gaining some slight confidence in the job market. Fed members ramped up their expectations for the unemployment rate, which they now expect will fall to 8.2 to 8.5 percent this year, down slightly from November’s projections of 8.5 to 8.7 percent.
Despite that slightly more optimistic projection, Bernanke said the jobs market remains “quite slack” and that unemployment will decline “only gradually” in the coming months.
In addition to those regular economic projections, the Fed also for the first time Wednesday unveiled the interest rate projections held by its members, in an effort to further clarify what the Fed is thinking when it comes to monetary policy.
That new information made clear how far some Fed members believe the economy needs to go before interest rates can begin climbing. Of the 17 FOMC members, 11 anticipate rates will not increase until 2014 at the earlier, with six believing rates will remain near zero past that.
The Fed’s lowering of economic expectations came one day after the International Monetary Fund (IMF) did the same for the global economy. The IMF revised down its expectations for global growth to 3.25 percent in 2012 from a 4 percent guess in November. The organization said Europe’s debt woes are a major contributor to the global slowdown, as the continent is expected to enter a “mild recession.”
“The world recovery, which was weak in the first place, is in danger of stalling,” said Olivier Blanchard, the IMF’s economic counselor.
The Fed also announced Wednesday it has a specific target of 2 percent for inflation, and generally expects unemployment to fall to 5.2 to 6 percent over the long run.
With the economy playing a major role on the presidential campaign trail, and the Fed playing a major role in the economy, it has become harder for Bernanke and the central bank to steer clear of partisan fights. Bernanke has been harshly criticized by a number of GOP candidates in recent months, but steered clear of politics Wednesday when asked if he would resign if a Republican president asked him to in 2013.
“I’m not going to get involved in political rhetoric,” he said. “As long as I’m here, I will do everything I can.”