Fed lowers GDP forecast, mulls more action

Wed Nov 2, 2011 5:07pm EDT
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By Pedro da Costa and Mark Felsenthal

WASHINGTON (Reuters) - The Federal Reserve on Wednesday slashed its forecast for growth, raised projections for unemployment and said it was mulling the possibility of buying more mortgage debt to spur a struggling recovery.

While members of the central bank's policy-setting panel voted 9-1 to hold a steady course, one official urged more stimulative action now and Fed Chairman Ben Bernanke said Europe's debt crisis posed big economic risks.

At a news conference after a two-day meeting, Bernanke said buying more mortgage-backed securities was an option to help the economy and added that the U.S. central bank was still looking for ways to give clearer guidance on its policy path.

"While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow," he said.

"Moreover, there are significant downside risks to the economic outlook," Bernanke said. "Most notably, concerns about European fiscal and banking issues have contributed to strains in global financial markets, which have likely had adverse effects on confidence and growth."

He said the central bank was "closely" monitoring developments in Europe. Group of 20 political leaders are meeting in Cannes, France, on Thursday and Friday, with the euro zone debt crisis expected to dominate talks.

One analyst speculated that concern about potential instability in Europe -- especially after a shock decision by Greece to hold a referendum on a bailout package that had been agreed to -- likely played into the Fed's decision.

"The Fed probably wanted to preserve its ammo until there was more clarity on how the European sovereign debt crisis unfolds," said Bernard Baumohl, chief global economist for The Economic Outlook Group, in Princeton, New Jersey.   Continued...