Fed Says Economic Recovery Is Weaker than Expected

The economic downgrade is connected to supply chain disruptions after Japan's earthquake

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The Federal Reserve downgraded its view of the economy Wednesday, saying the recovery is going slower than expected due to factors like higher food prices and disruptions on the supply chain in the wake of Japan's massive earthquake, Reuters' Mark Felsenthal and Glenn Somerville report. The Fed says it expects the economy to grow faster soon and will keep interest rates at very low levels. But the labor market has been "weaker than anticipated" after the central bank said it was "improving gradually" in April.

Reuters says the last two months of reports from the Fed show "clear loss of momentum in the world's largest economy." With high unemployment, falling housing prices, sluggish factory activity, and accelerating inflation, "Analysts have in recent weeks speculated the Fed may begin to consider what other tools it has to spur economic growth. Possible steps could include further asset purchases, or a bolstering of promises to markets that easy money policies will be in place until there are clear signs the recovery is taking off."

The Wall Street Journal says the new outlook has put off, for now, discussions about taking measures to prevent inflation. "Discussions at the April meeting focused on strategies for reducing the securities portfolio and eventually raising short-term interest rates," Luca Di Leo and Jon Hilsenrath write. "But a slew of discouraging economic data convinced many officials they need to stay on hold as they assess whether the bumps to growth and inflation seen in recent months are transitory, as officials believe." Bloomberg reports that reaction to the Fed outlook was muted in financial markets.

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