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The Federal Reserve signaled on Wednesday it is in no rush to scale back its support for the U.S. recovery as it cut its forecast for 2011 economic growth.
The Fed's policy-setting Federal Open Market Committee said after a two-day meeting it intends to complete its $600 billion US bond buying program in June as scheduled and suggested it would not let its balance sheet to run down immediately.
In the face of headwinds from high oil prices, the U.S. central bank said in a statement the economic recovery was proceeding at a "moderate pace," a change from a statement in 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, Fed Chairman Ben Bernanke said there was "a bit less momentum in the economy" and he foresaw "a relatively weak number, maybe under 2 percent" for growth in output in the first three months this year.
But he added: "I would say that roughly that most of the slowdown in the first quarter is viewed by the committee as being transitory."
The Fed cut 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 forecast for unemployment but said it would stay elevated over its three-year forecast period.
The U.S. central bank raised its estimate of inflation this year to a range of 2.1 percent to 2.8 percent, taking into account a recent surge in oil prices. However, it bumped its core inflation forecasts only marginally to a 1.3 percent to 1.6 percent range.
Prices of 30-year U.S. government bonds fell after the higher inflation forecasts from the Fed.
Interest rate futures showed traders continued to bet that the Fed would hold off on raising rates until early 2012.
Bernanke faced broad questioning, including on the falling value of the dollar for which the Fed is getting some blame because of its efforts to broaden credit availability.
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.
He said a growing economy would be helpful for the dollar.
In its earlier post-meeting statement, the Fed modestly upgraded its assessment of the jobs market, say it was "improving gradually." A month ago it said simply that it appeared to be improving.
Importantly, it again expressed confidence that a surge in the cost of oil and other commodities 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.
The statement marked the conclusion—at least for now—of the massive expansion of the Fed's balance sheet that helped pull the economy out of its deep recession.
"On policy, the statement confirms that (the bond buying) is over but otherwise leaves everything on the table subject to regular review 'in light of incoming information,'" said Stephen Stanley, chief economist at Pierpont Securities.
Still, the central bank said it would 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. Some investors, such as Bill Gross from PIMCO, the world's biggest bond fund manager, have predicted a bond market sell-off when the Fed steps out of the picture.
The bigger question for investors, however, is when will the Fed actively turn to tighten monetary policy.
The Fed cut interest rates to near zero in December 2008 and bought close to $1.4 trillion in longer-term securities to help spur a recovery from the economy's deep recession.
When the recovery stumbled last year, it launched its latest program to buy government bonds.
The plan met with withering criticism domestically and internationally. Even some Fed officials worry it could stoke inflation.
The Fed's unprecedented easy money policies have been accused of pushing up the cost of oil and other commodities. Top Fed officials have defended their actions by saying surging commodity costs primarily reflect rapid growth in emerging markets and that a healthy U.S. economy has global benefits.
The Fed lags other major central banks, including the European Central Bank, that have already moved to raise interest rates or are poised to do so.
This out-of-step U.S. monetary policy has undercut the dollar, which slid to a three-year low against major currencies on Wednesday. Analysts expect the greenback to remain under pressure.
Several Fed officials have expressed concern the central bank risks falling behind the curve in responding to price pressures if it does not reverse its ultra-loose stance soon.
Although headline inflation has shot higher since the start of the year, core price indexes closely monitored by the Fed are still well below levels that would normally cause alarm.
At the same time, higher commodity costs have weighed on consumer spending and the unemployment rate is still at a lofty 8.8 percent.
Analysts polled by Reuters expect a report on Thursday to show the economy advanced at a subdued 2.0 percent annual rate in the first quarter, if not slower. It expanded at a solid 3.1 percent pace in the final three months of last year.