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Fed turns optimistic for 2010

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November 25, 2009

The Federal Reserve on Tuesday raised its outlook for US economic growth in 2010 to a range of 2.5 to 3.5 percent, and said the troubles in unemployment appeared to be near a peak.

In a new forecast accompanying minutes from the Fed’s policy meeting November 3-4, the central bank said participants “anticipated that economic recovery would be gradual, with real gross domestic product (GDP) growing at a moderate pace and the unemployment rate declining slowly over the next few years.”

The range for 2010 growth was boosted slightly from a July projection of between 2.1 and 3.3 percent.

The new forecast also suggests that unemployment, which hit 10.2 percent in October, could ease in early 2010.

“Participants generally anticipated that the unemployment rate would rise somewhat further during the final months of 2009 and then decline steadily over the next few years,” said the forecast accompanying minutes from the Federal Open Market Committee meeting.

The new forecast indicates unemployment would drop to a range of 9.3 to 9.7 percent over the course of 2010. Joblessness would still remain high in 2011, in a projected range of 8.2 to 8.6 percent.

Growth in 2011 was expected to pick up to a more favorable pace of 3.4 to 4.5 percent, according to the forecast which also called for tame inflation through 2012.

The US economy expanded in the third quarter at a pace of 2.8 percent, according to government data released earlier Tuesday, in the first growth after four quarters of decline and the worst recession in decades.

Yet many economists say a recovery could be derailed by high unemployment, which hurts consumer confidence and income and cuts into spending that drives much of economic activity.

Fed members said the economy has suffered lasting damage from the crisis that would take many years to recover.

“Most participants anticipated that about five or six years would be needed for the economy to converge fully to a longer-run path characterized by a sustainable rate of output growth and by rates of unemployment and inflation consistent with their interpretation of the Federal Reserve’s objectives,” the Fed said.

“However, some participants indicated that the convergence process might well require even longer, while a few expected that although inflation would settle at its longer-run rate in the next several years, the convergence process for the real economy was likely to occur over a somewhat longer period.”

The minutes indicated that the economy extended its modest recovery in the weeks leading up to early November, led by industrial production and gains in consumer spending that got a boost from the federal government’s “cash for clunkers” auto incentives.

“Most participants now viewed the risks to their growth forecasts as being roughly balanced rather than tilted to the downside, but uncertainty surrounding these forecasts was still viewed as quite elevated,” the minutes showed.

The meeting featured considerable debate about the Fed’s exit strategy from a massive stimulus effort that has lowered base lending rates to a range of zero to 0.25 percent and a pledge to pump more than one trillion dollars into the economy through various liquidity programs.

Fed members expressed confidence that the central bank “would be in a position to remove policy accommodation when appropriate” through various tools including paying higher rates on bank reserves and establishing reverse auctions to drain the extra liquidity from the banking system.

The central bank indicated it would test some of these measures but “that such testing would not imply that these tools would be employed for policy purposes any time soon.”

2 Responses to Fed turns optimistic for 2010

  1. griff

    November 25, 2009 at 3:08 pm

    Great! These are the same geniuses that forecast no recession in 2008 and unemployment to only hit 8.5 percent in 2009.

    Keep the carrot dangling, Bernanke. There are still enough asses hungry enough to bite. 

  2. woody188

    November 25, 2009 at 3:50 pm

    If they were really confident they would raise interest rates.