- Associated Press - Wednesday, November 2, 2011

WASHINGTON — The Federal Reserve sketched 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’s gloomier forecast shows that the recovery from the recession has continued to fall short of expectations. Some economists said it makes the Fed more likely to act further to try to boost the economy, though probably not until early next year.

One option would be a program similar to the Fed’s $600 billion in Treasury bond purchases, which it completed in June. Some economists think the Fed could buy mortgage-backed securities instead, which could more directly support the depressed housing market by lowering loan rates.

Speaking at a news conference Wednesday, Chairman BenBernanke said that if conditions worsen, the Fed would consider buying more mortgage-backed securities . He declined to specify what would trigger such a move.

The Federal Reserve headquarters in Washington (AP Photo/Alex Brandon)
The Federal Reserve headquarters in Washington (AP Photo/Alex Brandon) more >

Bernanke did not go out of his way to dampen growing expectations” that another round of purchases is coming, said Dana Saporta, an economist at Credit Suisse. “If anything, he stoked those expectations.”

Still, a more aggressive effort to boost the economy would likely face resistance within the Fed. Ian Shepherdson of High Frequency Economics said the economy would have to deteriorate before the Fed would launch another round of purchases.

The Fed now predicts the economy will grow no more than 1.7 percent for 2011. For 2012, it foresees growth of about 2.7 percent. Both forecasts are roughly a full percentage point lower than its June forecast.

The Fed sees unemployment averaging 8.6 percent by the end of next year. In June, it had predicted unemployment would drop next year to as low as 7.8 percent. The rate is now 9.1 percent.

The Fed’s gloomier outlook is similar to many private economists’ forecasts. Bank of America Merrill Lynch, for example, expects only 1.8 percent economic growth this year and 2.1 percent in 2012.

Those growth rates are far too low to drive down unemployment.

At his news conference, his third this year, Bernanke acknowledged that the pace of growth will likely remain “frustratingly slow.”

“We remain prepared to take action as appropriate to make sure the recovery continues,” he said.

Even so, the Fed said the economy had improved since nearly stalling in the spring. As a result, it’s putting off any new actions so it can gauge the impact of steps it’s already taken.

Fed policymakers made the announcement after a two-day meeting.

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