By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — The Federal Reserve on Wednesday said it was surprised by the recent weakness in the economy but that the recovery would pick up later this year as it kept interest rates at historic lows and said a controversial bond buying program would end as planned.
The Federal Open Market Committee of the Fed said the moderate pace of growth and the weaker labor market were weaker than expected. The FEd said it expects inflation to subside as past energy prices and other commodity prices moderate.
The statement came as the FOMC said it was shifting policy to hold by allowing its $600 billion bond-buying program to end as scheduled on June 30.
The slower pace of growth reflects “in part” some temporary factors such as higher gasoline and food prices and disruptions to manufacturing from the Japan earthquake.
“The FOMC expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline,” the statement said.
The central bank confirmed it would hold its record $2.8 trillion balance sheet steady by reinvesting the securities that mature.
The Fed left its key interest rate at an historic low range of 0% to 0.25% where it has been since December 2008.
These decisions were widely expected. The FOMC also repeated that rates are likely to stay low for an “extended period.”
Attention now turns to Fed chairman Ben Bernanke’s news conference scheduled to begin at 2:15 p.m. Eastern. The Fed will also release updated economic forecasts at 2:00 p.m. just before the press conference begins, in which the central bank is expected to cut its 2011 growth outlook for the second time.
Since the FOMC met in late April, the economy has clearly stumbled.
The unemployment rate has moved higher to 9.1% from 8.8%.
Economists polled by MarketWatch expect first-half growth to average about a 2% rate. This is down from a 2.9% growth rate in 2010.
Inflation has moving higher in recent months.
The core consumer price index is up at a 1.5% annual rate in May after hitting a low of 0.6% in October 2010.
Economists give a mixed report for QE2. The program worked to rid the threat of deflation but did not help much with overall growth or the high unemployment rate. Read
