Fed delivers grim forecast for 2009

The Federal Reserve has forecast an economic contraction throughout the year, with a "moderate" recovery in 2010.


AFP - Data presented to Federal Reserve policymakers last month indicate an economic contraction for 2009 followed by a "moderate recovery" in 2010, minutes from the Fed meeting showed Tuesday.

The minutes from a December 15-16 Federal Open Market Committee (FOMC) meeting at which policymakers cut rates to near zero showed a staff report including a grim economic forecast.

The staff report showed economic activity "appeared likely to decline substantially in the fourth quarter of 2008."

"The staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010," the minutes stated.

The data showed an economy suffering on multiple fronts: weak labor conditions, declining consumer and business spending, declining stock market wealth and tight credit.

The housing market, where the economic crisis began, "was expected to contract further," the report stated.

"All told, real GDP (gross domestic product) was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede," according to the minutes.

"Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010."

US economic activity contracted at a 0.5 percent pace in the third quarter, according to the latest official data available.

But many economists see a sharp contraction at a pace of up to 6.0 percent in the fourth quarter and ongoing weakness in 2009.

According to the FOMC minutes, "In their discussion of the economic situation and outlook, all meeting participants agreed that the economic downturn had intensified over the fall."

"The information reviewed at the December meeting pointed to a significant contraction in economic activity in the fourth quarter," the minutes stated.

Still, the majority of members appeared to indicate the contraction would ease sometime in 2009, even if the outlook remained highly uncertain.

"Most (FOMC members) projected that the economy would begin to recover slowly in the second half of 2009, aided by substantial monetary policy easing and by anticipated fiscal stimulus," the minutes said.

"Meeting participants generally agreed that the uncertainty surrounding the outlook was considerable and that downside risks to even this weak trajectory for economic activity were a serious concern."

Some of the data suggested "the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome," according to the Fed minutes.

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