Economy expected to limp longer

Fed forecasts little change in jobless rate

Three years after the Great Recession ended, the Federal Reserve said Wednesday that the economy and job market will be limping along longer than it expected.

Acting on its more pessimistic outlook, the Fed moved again to push down long-term interest rates — already at or near record lows — to spur consumer spending and business investment.

Of greatest concern: The Fed expects the 8.2% jobless rate to be little changed by year’s end. And unemployment would still be 7.5% to 8% by the end of 2013, the Fed’s revised forecast says.

Fed policymakers now expect the economy to grow just 1.9% to 2.4% this year, down about half a percentage point from its April forecast. Growth has averaged 2% the last four quarters.

A slowing economy could hurt President Obama’s re-election bid. Amid a worsening European debt crisis that has created uncertainty in the U.S., job growth, factory output and retail sales all have slowed recently.

In a statement, the Fed said it still expects the economy to grow moderately this year but then to pick up “very gradually.”

To boost the economy, the Fed took a widely expected step of extending to year’s end a shift in its Treasury portfolio from short-term to longerterm securities.

The program, which began last September and was ending this month, involved the Fed buying $400 billion in long-term Treasuries and selling a like amount of short-term bonds. The Fed will transfer an additional $267 billion to longerterm notes in an effort to push down long-term rates and, it hopes, spark more home purchases and factory expansions.

Fed Chairman Ben Bernanke said policymakers are open to taking the more dramatic step of buying more Treasuries outright to lower long-term rates even further if the economy worsens.

“We’re prepared to do more,” especially if job growth doesn’t improve, he said.

The odds of the Fed providing a bigger stimulus “have increased substantially,” IHS Global Insight’s Paul Edelstein said in a research note.

Bernanke said lower rates should prompt corporations to borrow more to expand and hire. “I think it is a substantive step, and it will provide some additional support,” he said.

Anthony Valeri, a fixed-income strategist for LPL Financial, said the Fed move is unlikely to spur more home buying. With a weak job market, consumers are less likely to borrow and banks are less likely to lend.

“A lot of this is beyond the Fed’s control,” he said.

Doug Roberts, chief investment strategist for Channel Capital Research, said the Fed move should boost stocks by driving investors from low-risk holdings like Treasuries.