The United States Federal Reserve has adjusted its growth figure for the year down from 2.9 to 2.4%. The reduction of 0.5% on the nation’s GDP projection doesn’t sound too bad, but when you express it as a percentage of the initial growth estimate, the Fed has pruned it expectations by a whopping 17%.
Unsurprisingly, the Fed has also had to trim back its predictions for unemployment which were set as 8% in April to 8.2% currently. Slowing economic growth means that fewer jobs will be created and, depending on the extent of the slowdown, fresh jobs may be lost.
As a consequence of the gloomier economic data, the Federal Reserves quantitative easing measures, known as Operation Twist, is set to continue until the end of the year, at least. The programme is worth $267 billion and is designed to kill two birds with one stone. By giving money to financial institutions to purchase government assets, notably long-term bonds, the demand for the assets is kept high which should keep the yield in-check. The programme also involves a “debt swap” element whereby assets with short (residual) lives of less than three years are sold and the proceeds used to buy assets with six to thirty years remaining until maturity. As a secondary effect, the institutions that make the purchases on the government’s behalf will earn commissions on the transactions. This, it is hoped, will boost their liquidity and encourage them to loan money to business at affordable rates, thereby helping to boost the economy.
The Fed remains concerned about the stubbornly high level of unemployment in the USA which is running at almost twice its long-term average. Mr Bernanke noted: "We are prepared to take further steps if necessary to promote sustainable growth and recovery in the labour market".
Federal Reserve interest rate policy remains unchanged with rates in the range from 0 to 0.25% - historically low levels.