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Federal Reserve issues dire warnings on US and Europe crisis

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Announcement: Federal Reserve Chairman Ben Bernanke attends a news conference following a two-day policy session in Washington D.C. on Wednesday

Europe’s debt crisis poses huge risks to America – while improvements in growth and unemployment are going to be much slower than first thought.

Those were today’s dire warnings from the U.S. central bank, although it did note the strengthening in the country’s economy in the third quarter.

The Federal Reserve held monetary policy steady in a 9-1 vote and offered no direct hints it is looking at fresh ways of helping the economy.

Fed Chairman Ben Bernanke said economic activity and labour market conditions will improve, but ‘progress is likely to be frustratingly slow’.

‘Moreover, there are significant downside risks to the economic outlook, most notably concerns about European fiscal and banking issues,’ he said.

‘They have contributed to strains in global financial markets, which have likely had adverse effects on confidence and growth.’

He said the central bank left open the possibility of expanding its holdings of mortgage debt if U.S. economic conditions worsened.

‘I do think that purchases of mortgage-backed securities is a viable option. Certainly, something we would consider if the condition were appropriate.’

In fresh quarterly projections, the Fed lowered its forecasts for growth and raised its forecasts for unemployment for this year and the next two.

Policymakers did not see the jobless rate of 9.1 per cent falling to a level they consider consistent with full employment even by 2014.

Officials now expect the world’s largest economy to grow by 2.5 to 2.9 per cent next year, down from June’s forecast of 3.3 to 3.7 per cent.

They saw the unemployment rate going no lower than 8.5 to 8.7 per cent by the end of 2012, up from 7.8 to 8.2 per cent envisioned in June.

Fed officials believe a jobless rate of between 5.2 and 6 per cent will give full employment. They say it will get to a minimum of 6.8 per cent by 2014.

Mr Bernanke has called the lofty level of U.S. unemployment, which has held above 9 per cent for the past five months, a national crisis.

Charles Evans, president of the Chicago Federal Reserve Bank, dissented on Wednesday because he wanted the central bank to ease policy at this meeting.

U.S. stocks held earlier gains after the statement was released, while 10-year Treasury note prices slipped.

The Dow Jones closed up more than 175 points as investors were calmed by the Fed saying it will do more for the economy if the conditions warrant.


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