Housing Woes Lead Fed to Cut Growth Forecast

In the last of three monetary policy press conferences scheduled this year, ""Federal Reserve"":http://www.federalreserve.gov Chairman Ben Bernanke said Wednesday that ""ongoing drags from troubled housing conditions and still tight credit"" have led Fed officials to downgrade their forecasts for short-term economic growth to ""only moderate.""

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The U.S. central bank expects gross domestic product (GDP) to grow between 1.6 percent and 1.7 percent for the year. In June, that projection was 2.7 percent to 2.9 percent.

""The housing sector is a very important sector…problems in that sector are clearly a big reason why our economy is not recovering more quickly,"" Bernanke quite frankly told reporters.

Given the state of the housing market, the extent of financial repair needed, and “a certain amount of bad luck” stemming from the economic upheaval in Europe, “we did overestimate the pace of recovery,” Bernanke said.

He added that economic growth in the second half of 2011 has been weaker than Fed officials were anticipating when he sat in front of reporters at the last press conference in June.

The bond market's Treasury Borrowing Advisory Committee (TBAC) said in ""its own statement"":http://www.treasury.gov/press-center/press-releases/Pages/tg1350.aspx Wednesday that economic activity has received support recently from a rebound in motor vehicle production and an easing in energy prices. But there’s been little help from the housing sector, which has historically been a driver of economic recovery following a recession.

“So far, pessimism about the economy has manifested itself more in the housing market than in consumer spending,” the TBAC said.

Bernanke conceded that consumer confidence is at the depths seen during the lowest point of this recession,

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largely because of the lackluster conditions plaguing local housing markets throughout the country.

But the Federal Reserve ""announced no new policy measures"":http://www.federalreserve.gov/newsevents/press/monetary/20111102a.htm after its two-day meeting concluded Wednesday. This inaction, coupled with the diminished outlook for economic growth and Bernanke’s repeated references to the depressed housing market prompted reporters to press for officials’ rationale in foregoing another round of large-scale mortgage-backed securities (MBS) purchases.

Bernanke conceded that such a move is one of the tools in the Fed’s arsenal and said should economic conditions continue to fall short of the central bank’s objectives “we would certainly look at” purchasing more MBS to provide additional support for the housing market.

“We remain prepared to take action as appropriate” dependent on economic conditions and financial growth going forward, Bernanke said, adding that “ultimately we would like to return our portfolio to Treasuries only, but that is likely some time down the road.”

The Fed plans to stick with its program to extend the average maturity of its securities holdings as announced in September and continue reinvesting principal payments from its holdings of GSE debt and MBS into new mortgage bonds.

Officials again voted to keep the target range for the benchmark federal funds rate at 0 to 0.25 percent and reiterated their expectations that the rate would remain at this level through at least mid-2013.

Chicago Fed President Charles Evans was the only committee member to cast a dissenting vote against the monetary policy action (or lack thereof). Evans argued that the current state of the economy calls for immediate additional policy accommodation.

He also pressed for a revision to expectations for the federal funds rate by clearly stating that it would remain near-zero until unemployment drops below 7.5 percent. The Federal Reserve isn’t forecasting that to happen until the latter part of 2014.

When asked for his reaction to the Occupy Wall Street protests taking place across the country, Bernanke said the best way to address the inequality lamented by these activists is to create jobs.

“I understand many people are dissatisfied with the state of the economy. I’m dissatisfied with the state of the economy,” Bernanke said. “I fully sympathize with the notion that the economy is not performing the way that it should be.”