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Fed eyes steps to bolster recovery

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A new program to spark more lending to businesses and consumers could be created

By Associated Press

WASHINGTON— Federal Reserve officials cut their forecasts for growth this year and signaled they stood ready to take new steps to keep the recovery alive if the economy worsens.

A new document, released Wednesday, revealed a more cautious mood among the Fed policymakers in light of Europe’s debt crisis, a volatile Wall Street, a stalled housing market and high unemployment.

With risks growing, Fed officials at their June 22-23 meeting saw the need to explore new options for bolstering the economy. That’s a turnaround from earlier this year when they were moving to wind down crisis-era supports.

No new specific steps were disclosed or agreed upon at that time.

However, if the recovery were to deteriorate, Fed policymakers have options. They could revive programs to buy mortgage securities or government debt. They could lower the rates banks pay for emergency Fed loans. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.

The economic and political hurdles for taking such action would be high, economists said.

“If the economy takes a nasty spill, then yes, it would take new policy action. But if we continue to see kind of mediocre, ho-hum growth, then that won’t be enough for them to move,” said Michael Feroli, an economist at JPMorgan Chase.

In the end, Fed Chairman Ben Bernanke and his colleagues agreed at the June meeting to hold a key interest rate at a record low near zero to help energize the economy. And they repeated a pledge to keep rates there for an “extended period.”

At that time, Fed policymakers said they didn’t think the slowing in the economy seen thus far warranted new stimulative actions besides those already in place, according to the minutes of the June meeting.

However, Fed officials said the central bank “would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably,” the document stated.

Fed officials concluded that the “economic outlook had softened somewhat.” In fact, one-half of Fed officials saw “risks to growth as having moved to the downside.”

Against this backdrop, Fed officials offered a slightly more downbeat view of the economy.

They now predict the economy will grow

between 3 percent and 3.5 percent this year. That’s down from forecast of 3.2 percent to 3.7 percent made in April.

There’s little relief in sight for high unemployment. The jobless rate, now at 9.5 percent, would stay at that figure or in the best case fall to 9.2 percent this year. In the April forecast, the Fed had a slightly lower bottom number of 9.1 percent.

The weaker outlook chilled Wall Street’s recent winning streak. The Dow Jones industrial average close up only 3.70 points to 10,366.72.

Bernanke has publicly downplayed the odds of the economy sliding back into a “double-dip” recession. He will provide lawmakers in Congress with a fresh economic outlook in back-to-back appearances on Capitol Hill next week.

Economists predict the Fed will keep the key rate at a record low well into next year and possibly into 2012. The Fed has leeway to hold it at a record low because inflation isn’t a threat to the economy.

In fact, the minutes said that a few Fed officials worried about the risk of deflation. That’s a widespread and destabilizing fall in prices of goods, prices of homes and stocks and a drop in wages. The country’s last serious bout with deflation was in the 1930s.