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Associated Press/Photo by Evan Vucci

Unexpectedly slow

Money | Surprised by the weak economy, Bernanke vows to keep rates low

Issue: "Focus on Mitt Romney," July 16, 2011

"The economic recovery is continuing . . . though somewhat more slowly than the Committee had expected." So said the Federal Reserve Open Market Committee after its June meeting, also noting that "recent labor market indicators have been weaker than anticipated" and "the housing sector continues to be depressed."

The Fed dropped its growth projection for 2011 by roughly half a percent and predicted unemployment would be higher next year than originally forecast.

Open Market Committee members, who include the Fed's Board of Governors and several presidents of Federal Reserve member banks, opted to keep interest rates at record lows of 0.0 to 0.25 percent, saying the low rates would likely continue for an "extended period."

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At a follow-up news conference, Fed Chairman Ben Bernanke said the term "extended period" was meant to be "intentionally opaque" because "we don't know exactly how long." Any change of rates "will depend on how the economic outlook changes," he said.

The Fed chairman conceded he was somewhat flummoxed about why the economy hasn't performed up to expectations: "We don't have a precise read on why this slower pace of growth is persisting."

Urgent warning

In its annual report on the long-term federal budget outlook, the Congressional Budget Office again warned that the government's "imbalance between spending and revenues" cannot continue indefinitely. The budgetary arm of Congress noted that excessive borrowing in recent years has driven the public debt-which was equal to about 40 percent of U.S. gross domestic product in 2008-to nearly 70 percent of GDP.

"To keep deficits and debt from climbing to unsustainable levels, policymakers will need to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches," the report said.

CBO analysts acknowledged their "projections [likely] understate the severity of the long-term budget problem because they do not incorporate the negative effects that additional federal debt would have on the economy." Another missing factor, according to the CBO: "the impact of higher tax rates on people's incentives to work and save."

Price push

The Labor Department confirmed what many consumers already know: The cost of living is rising. Year-over-year price increases notched a 3.6 percent rise in May, the department said, meaning that overall prices in May 2011 were 3.6 percent higher than a year earlier. (As recently as November, the year-over-year increase was only 1.1 percent.) The two biggest drivers of higher prices over the past 12 months were energy (up 21.5 percent) and food (up 3.5 percent). Without food and energy costs, year-over-year prices were up 1.5 percent.

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