Fed Chairman Ben S. Bernanke is under pressure from all sides to do whatever… (Kevin Lamarque / Reuters )
Reporting from Washington — Amid increasing political pressure and turbulent financial conditions in the world economy, the Federal Reserve is letting its massive bond-buying stimulus program expire in the next few days without a new initiative to prop up the weak American recovery.
The central bank is betting that, even without additional monetary or fiscal stimulus, U.S. economic growth will pick up sharply in the latter part of the year after a disappointing first half. But in adopting a kind of wait-and-see policy, the Fed faces increasing risk of antagonizing politicians from the right and the left, as well as investors.
In a news conference after the Fed's regular policy meeting Wednesday, Fed Chairman Ben S. Bernanke said that at least part of the recent slump was caused by what he believes are temporary factors, such as inflated energy prices that hurt consumer purchasing and the Japanese earthquake and tsunami that disrupted businesses, particularly in the auto industry.
Still, reflecting the negative events in recent weeks, the Fed significantly downgraded its economic assessment and outlook.
Most of the Fed's policymakers now see the economy growing this year at less than 3%, compared with growth as high as 3.3% forecast in April.
Bernanke and his colleagues painted a gloomier picture for the job market as well. The nation's unemployment rate is now projected to remain near its current level of 9.1% through this year; Fed officials previously believed that the rate would dip closer to 8.5%.
Of the unemployment rate, he said, "we expect [it] to continue to decline, but the pace of progress remains frustratingly slow."
Bernanke said his own projections for a pickup in growth reflected the Fed policymaking committee's general view. But he didn't project a lot of confidence, saying the outlook is "very tentative and depend[s] on a lot happening … and certainly subject to change as new information comes in."
Wall Street also didn't show a lot of confidence as stocks fell after the press conference. The Dow Jones industrial average, for instance, ended the day down 80.34 points to 12,109.67, with all the loss coming in the last 90 minutes of trading.
Like Fed officials, many private economists have lowered their forecasts. They remain worried about the prolonged weakness in the housing and job markets.
Adding to their concerns is turmoil over Greece's debt-restructuring problems, along with Washington politicians' wrangling over the federal deficit and the looming debt-ceiling deadline.
The nonpartisan Congressional Budget Office said Wednesday the "explosive path" of the nation's public debt would exceed 100% of GDP by 2021, even with expected policy changes.
The bleak outlook "underscores the need for large and rapid policy changes to put the nation on a sustainable course," the report said.
Yet the CBO also pointed to the difficulty of taking swift corrective action.
"Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery," the CBO said.
Bernanke said Fed officials discussed the European situation. "It's one of several potential financial risks that we're facing now," Bernanke said, although he noted that U.S. banks faced little direct exposure.
On the U.S. budget, Bernanke said he didn't think that sharp, immediate cuts in the deficit would create more jobs, as some Republican and other advocates for belt-tightening have argued.
"In the very short run," he said, "the fiscal tightening is … at best neutral, but probably somewhat negative for job creation."
As expected, the Fed left the key short-term interest rate that it controls at near zero, and the central bank said in its statement that this is where the rate would stay for "an extended period." Bernanke said that period meant "at least two or three" Fed policy meetings down the road, suggesting no change before November.
Most analysts say the Fed will not begin to raise the overnight bank-lending rate, which influences borrowing costs more broadly and is now at rock-bottom, until at least next year.
Fed policymakers also agreed unanimously to let their $600-billion program to buy U.S. Treasury bonds lapse at the end of this month, as scheduled. The buying was aimed at holding down long-term interest rates to spur more lending and boost the recovery.
Bernanke has indicated a reluctance to extend large monetary stimulus because of uncertainty over whether the benefits would outweigh the risks. Many experts and critics are concerned that the central bank's easy-money policies are setting up the economy for spiraling inflation.
The Fed chief has come under fire from Republican presidential candidates — and not just from his longtime nemesis, Ron Paul, the Texas congressman who has built a career trying to abolish the Fed.