Fed's outlook for the economy is revised lower
— -- The Federal Reserve delivered a bleaker outlook Wednesday for the economy, which it thinks will grow much more slowly and face higher unemployment than it had estimated in June.
The Fed now predicts the economy will grow a scant 1.6% to 1.7% for 2011. For 2012, it estimates growth will range between 2.5% and 2.9%. Both forecasts are roughly a full percentage point lower than its June forecast.
The Fed sees unemployment of between 8.5% and 8.7% next year. In June, the Fed had predicted unemployment would drop next year to as low as 7.8% from 9.1% now.
Even so, the Fed said earlier, after its policy meeting, that the economy had improved since nearly stalling in the spring. As a result, it is putting off any new actions so it can gauge the impact of steps it's already taken.
Fed policymakers made that announcement, after a two-day meeting.
In their statement immediately after the meeting, before delivering their revised outlook, members of the Federal Open Market Committee said the economy has strengthened and consumers have stepped up spending. Still, they said the economy continues to face significant risks, including the debt crisis and risk of recession in Europe.
The Fed left open the possibility of taking steps later to try to boost the sluggish economy. But it gave no hint as to what those moves might be.
"They're noting the better growth numbers but remain pretty cautious," said Michael Feroli, a former Fed economist now with JPMorgan Chase. "They're not celebrating by any means, which probably is appropriate."
The vote on the policy stance was 9-1. Charles Evans, president of the Chicago Federal Reserve Bank, dissented. The statement said Evans wanted to take stronger action to try to boost the economy.
The vote was a shift from the previous two Fed meetings, when three members dissented for the opposite reason: They opposed the Fed's continued efforts to keep interest rates super-low, for fear it could ignite inflation. Those three members, known as inflation "hawks," dropped their opposition this time.
Some analysts say the shift doesn't necessarily mean the Fed is more likely to take additional action soon to try to boost the economy.
"The view of the hawks is that once the decision has been made by the majority, it just causes confusion if they continue to vote to roll back action that has already been taken," said Paul Ashworth, chief U.S. economist at Capital Economics.
Stocks had little initial reaction to the announcement. Prices remained sharply higher, as they had been all morning.
Some analysts say they expect the Fed to take further action to support the economy at coming meetings, given the expectation that growth will remain sub-par.
"Policymakers are keeping the door open because the unemployment rate remains high, and there are clear downside risks from the economic situation in Europe," said Sal Guatieri, senior economist at BMO Capital Markets.
After their September meeting, policymakers said they would shuffle the Fed's investment portfolio to try to further reduce long-term interest rates. And in their previous meeting in August, they said they expected to keep short-term rates near zero until at least mid-2013, unless the economy improved.
The Fed repeated the mid-2013 timeframe in its statement Wednesday. It also said it is continuing its program to rebalance its portfolio to try to lower long-term rates.
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