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Fed expects slow recovery, but higher jobless figures

Text by NEWS WIRES

Latest update : 2009-07-15

The US Federal Reserve expects a slow recovery to start in the second half of 2009, reducing the economy's 12-month contraction to between 1 and 1.5 percent. But the bank also said unemployment could reach 10.1 percent, up from earlier estimates.

AFP - The Federal Reserve said Wednesday the recession-bound US economy is headed toward a second-half recovery and that this would likely lead to an easing of its unprecedented stimulus efforts.
   
The central bank raised its outlook for 2009 and 2010, projecting a rebound in the second half of 2009 that would leave the economic contraction for the year at between 1.0 and 1.5 percent.
   
Although it gave no detailed forecast for the second half of 2009, the rebound would have to be robust to offset the 5.5 percent pace of decline in the first quarter, on the heels of a 6.3 percent slide in the fourth quarter of 2008.
   
"If this forecast comes true, the recession will end this year," said Josh Feinman, chief economist at Deutsche Bank's DB Advisors.
   
To achieve the figures in the Fed outlook, "we're going to have to get some sort of growth and there would presumbaly be enough positive momentum to declare an end to the recession," he said.
   
"But it's a forecast. It's a reasonable forecast, but it's still not a reality."
   
For 2010, the new Fed outlook saw growth in a range of 2.1 to 3.3 percent, slightly better than its forecast from April. For 2011, the Fed called for growth in a range of 3.8 to 4.6 percent.
   
The Fed noted that despite the projected snapback, the economic remained weak with many downside risks.
   
Although the overall economic outlook was better, the Fed also raised its forecast for unemployment, saying the jobless rate would peak this year in a range of 9.8 to 10.1 percent, compared with its April forecast of 9.2 to 9.6 percent.
   
"Most participants indicated that 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" on inflation and employment, the central bank said.
   
The new forecast came in projections released with minutes of the Federal Open Market Committee from June, along with comments from Fed members and a discussion of the central bank's staff forecast.
   
"Almost all participants viewed the near-term outlook for domestic output as having improved modestly relative to the projections they made at the time of the April FOMC meeting," the document said.
   
The Fed said its staff economists also raised their outlook based on recent data even though the rate of unemployment was higher than expected.
   
"Consumer spending appeared to have stabilized since the start of the year, sales and starts of new homes were flattening out, and the recent declines in capital spending did not look as severe as those that had occurred around the turn of the year," the Fed said
   
"Moreover, it seemed likely that economic activity was in the process of leveling out, and the considerable improvements in financial markets over recent months were likely to lend further support to aggregate demand."
   
The Fed also addressed concerns about its ability to end an unprecedented effort to stimulate the economy by making credit available at ultra-low rates to a variety of financial institutions.
   
"Ensuring that policy accommodation can ultimately be withdrawn smoothly and at the appropriate time would remain a top priority of the Federal Reserve," the Fed said.
   
The Fed pointed out a drop in demand for some of its special programs to get liquidity into the financial system in recent months, noting that "market conditions had improved."
   
But the Fed said it had decided in June to maintain these programs and extend them into early 2010 because of a still "fragile" financial system.
   
"Moreover, participants viewed the availability of the liquidity facilities as a factor that had contributed to the reduction in financial strains," the Fed report said.
   
As a result, the Fed extended most of the programs into February 2010 but said that "improved market conditions and declining use of the facilities warranted scaling back, suspending, or tightening access to several programs."

Date created : 2009-07-15

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