Fed cuts GDP forecast; no hint of more support

WASHINGTON, (Reuters) - The Federal Reserve cut its forecasts for U.S. economic growth, but offered no hint of further monetary support, saying growth should pick up soon.

 In quarterly projections released at the end of a two-day policy meeting, the central bank dialed down its GDP forecasts for both this year and next.

 While the Fed pinned a recent slowdown in growth and quickening of inflation partly on transitory factors, Fed Chairman Ben Bernanke said some of the headwinds facing the economy could prove a lingering drag on the economy.

 “Part of the slowdown is temporary and part of it may be longer lasting,” he told a news conference after a two-day Fed policy meeting.

 The Fed said the economy should grow 2.7 to 2.9 percent this year, a forecast marked down from a 3.1 to 3.3 percent April projection. It said it sees 2012 growth in a 3.3 to 3.7 percent range, also lower than its previous forecast.

 In a policy statement, the central bank said a jump in commodity prices and supply-chain disruptions from Japan’s devastating earthquake had both weighed on growth and pushed up prices, but that those factors should dissipate over time.

 As widely expected, the Fed said it will maintain interest rates at exceptionally low levels for an extended period. It also confirmed it was ending its $600 billion bond-buying program at the end of the month, while reiterating that it will continue to reinvest principal payments from its holdings.

 U.S. stocks weakened slightly as Bernanke spoke to reporters following the Fed’s meeting. Prices for U.S. government bonds were nearly flat and the dollar edged up against the euro.

 “There are no hints of further easing from the Fed,” said

Nick Bennenbroek, head of G20 forex strategy at Wells Fargo in New York. “The statement overall disappointed investors looking for more bearish language and that’s why we are seeing the dollar rally a little bit.” In a wide-ranging discussion that touched on issues as diverse as Greece’s economic woes and the size of reserves that big banks should hold, Bernanke conceded that U.S. hopes were partly hostage to events in Europe.

 “If there were a failure to resolve that (Greek debt) situation it would pose threats to the European financial system, the global financial system, and to European political unity,” he said. “So yes, we did discuss it and it is one of several potential financial risks that we are facing now.” LONG CRAWL BACK

 Two years after the end of the U.S. recession, the recovery looks disappointingly weak.

 While Fed officials have persistently said they expect growth to accelerate, reports since the Fed’s April meeting show a clear loss of momentum in the world’s largest economy.

 Employers have been reluctant to hire and the jobless rate remains stubbornly high, climbing to 9.1 percent in May.

 The Fed downgraded its view of the labor market, saying it had been “weaker than anticipated” and pushed its forecast for unemployment higher.

 It said the jobless rate would likely average 8.6 to 8.9 percent in the fourth quarter, down a bit from a May reading of 9.1 percent but up from the Fed’s April projections. Even in 2013, the Fed said joblessness would still be significantly above what it considers to be consistent with full employment.

 The Fed’s inflation forecast was little changed at 2.3 to

2.5 percent for this year, but its projection of core prices, which strips out food and energy costs, moved up to a 1.5 to 1.8 percent range from 1.3 to 1.6 percent.

 Policymakers at the Fed strive to keep inflation in a 1.7 percent to 2 percent range, and the acceleration in core prices could complicate any desire to further support the economy.

 With jobs uncertain and home values falling, consumer spending, which makes up around 70 percent of U.S. GDP, has lagged. Factory activity has been sluggish as well.

 The economy grew at just a 1.8 percent annualized rate in the first three months of the year. Analysts expect growth in the second quarter to log a rate of around 2 percent, still not sufficient to generate a big uptick in hiring.