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Despite poor forecast, Fed sees signs of hope

Latest update : 2009-05-20

The US Federal Reserve has worsened its forecast for 2009, anticipating a GDP drop of between 1.3 and 2.0 percent and an unemployment rate that could hit 9.6 percent. But the Fed also predicted economic improvement from July onwards.

AFP - Federal Reserve policymakers are seeing "tentative evidence" the US economy is emerging from recession and could show modest growth in the second half of 2009, minutes released Wednesday showed.
The central bank revised its economic outlook Wednesday to show a drop in US output to a range of between 1.3 and 2.0 percent over 2009, but said some of the worst declines may be over.
While that was weaker than the range of a 0.5 to 1.3 percent decline in the last official forecast in February, the minutes said the Fed staff had "revised up" its more recent outlook "in response to recent favorable financial developments as well as better-than-expected readings on final sales."
The minutes from the April 28-29 Federal Open Market Committee meeting showed a slightly more optimistic tone from central bank policymakers although they noted a range of ongoing economic and financial market woes.
"Participants agreed that the information received since the March meeting provided some tentative evidence that the pace of contraction in real economic activity was starting to diminish," the minutes showed.
"Participants noted that financial market conditions had generally strengthened, and surveys and anecdotal reports pointed to a pickup in household and business confidence, which nonetheless remained at very low levels."
The Fed staff forecast prepared for the meeting showed a growing number of signs that the recession that began in December 2007 was easing.
"Consumer purchases appeared to have stabilized after falling in the second half of 2008, and the steep decline in the housing sector seemed to be abating," the Fed minutes said of the staff forecast.
"However, the contraction in the labor market persisted into March, industrial production again fell rapidly, and the broad-based decline in equipment and software investment continued."
At the same time, the Fed said, improvements in financial and credit markets were encouraging.
"Private borrowing rates moved lower, stock prices rose substantially, and some measures of financial stress eased," the Fed said.
"The staff's projections for economic activity in the second half of 2009 and in 2010 were revised up, with real GDP (gross domestic product) expected to edge higher in the second half and then increase moderately next year."
The report was in line with comments earlier this month from Fed chairman Ben Bernanke, who said he expected the economy "to bottom out, then to turn up later this year."
US economic output contracted a massive 6.1 percent in the first quarter of 2009 after a 6.3 percent slide in the previous quarter.
The new Fed outlook projected unemployment to rise from the current 25-year high of 8.9 percent. It projected a range of between 9.2 to 9.6 percent this year, higher than the February forecast.
The central bank also called for inflation to hold in a range of 0.6 to 0.9 percent over 2009.
The growth outlook for 2010 was a modest pace of 2.0 to 3.0 percent.
Overall, the Fed said it would take a number of years to achieve the central bank's goals on growth, inflation and employment levels.
Most Fed members "indicated they expected the economy to take five or six years to converge to a longer-run path characterized by a sustainable rate of output growth and by rates of unemployment and inflation consistent with the Federal Reserve's dual objectives, but several said full convergence would take longer," the minutes stated.
Jon Ogg at the financial website 24/ said the markets appeared to be disappointed that the Fed had not offered some hint that it would lift interest rates from the base level of zero to 0.25 percent.
"What we were looking for were comments regarding a potential exit strategy for near-zero rates on Fed funds and an outlook noting the recent increase in commodity prices potentially adding to inflation," he said.

Date created : 2009-05-20