The Federal Reserve has signaled it sees an end this year to the brutal recession and hinted that it was preparing an "exit strategy" for its unprecedented stimulus efforts.
The central bank raised its outlook for 2009 and 2010 economic output, projecting a rebound in the second half of 2009 that would leave the 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."
The Fed also appeared to address concerns that it lacked an exit strategy to pull back some of its vast stimulus to avoid a surge in inflation as the recovery takes hold.
"Ensuring that policy accommodation can ultimately be withdrawn smoothly and at the appropriate time would remain a top priority of the Federal Reserve," the Fed said.
John Ogg at 24/7Wall Street.com said the Fed "is now telegraphing that it is looking for an exit strategy to the very low-to-zero interest rate policy."
He added: "We still would not expect a major change immediately, but this is Fed-speak for ‘Don’t tell us that we didn’t warn you that this free money and this yield curve would last forever.’"
The Fed has pledged over one trillion dollars to help the financial system recover in a program some call quantitative easing.
Brian Bethune at IHS Global Insight said the latest statement shows "the Fed feels confident about scaling back some of its programs, signaling that it is scaling back quantitative easing programs prudently in line with the performance of the economy."
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.
"You can interpret this as the Fed saying that it sees the recession ending but is not looking for spectacular growth," said Avery Shenfeld, economist at CIBC World Markets. "But it will be a challenge to make the top end of that range in 2010."
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 economy 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.
For inflation, the forecast was boosted to show price rises of 1.0 to 1.4 percent from an April range of 0.6 to 0.9 percent. This was likely to ease fears of deflation taking hold.
"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.