Fed sees end to US downturn - Rising unemployment will persist

Fed sees end to US downturn - Rising unemployment will persist
By Sarah O’Connor in Washington and Kiran Stacey in New York
Copyright The Financial Times Limited 2009
Published: July 15 2009 20:50 | Last updated: July 16 2009 00:32
http://www.ft.com/cms/s/0/5df7e4ac-7177-11de-a821-00144feabdc0.html


The US Federal Reserve believes that the recession will end “before long”, but predicts that unemployment will remain at high levels for several years to come.

The federal open market committee raised its forecasts for unemployment, according to minutes from their last meeting three weeks ago, and now expects it to reach between 9.8 and 10.1 per cent in the last quarter of this year. It envisages it will remain at about 9.6 per cent next year and 8.6 per cent in 2011.

“Labour market conditions were of particular concern to meeting participants,” the minutes said, adding that “most participants anticipated that the employment situation was likely to be downbeat for some time”.

But the prospects for the wider economy were brightening, they said. The committee’s members agreed that “the economic contraction was slowing” and predicted that gross domestic product would drop by between 1.5 per cent and 1 per cent this year, more optimistic than their last forecast in April of a 2 to 1.3 per cent contraction.

For next year, they raised growth forecasts to between 2.1 per cent and 3.3 per cent, from a 2 to 3 per cent range. They increased projections for inflation, but they all expect it to remain below 2 per cent through this year and the next.

“The unemployment forecasts ... are an interesting signal from the Fed’s point of view,” said John Silvia, chief US economist at Wells Fargo. “[It sees] the economy picking up and having a recovery, but with persistent unemployment. It’s not a jobless recovery, but it sure is below average job growth in this sort of environment.”

Most committee members saw the economy as “still quite weak and vulnerable to further adverse shocks”. Because of the prospects for “weak economic activity, substantial resource slack and subdued inflation”, it decided to keep interest “exceptionally low” for an extended period.

Investors were unmoved by the release of the minutes. Stocks clung near their highs of the session and US Treasury bonds edged slightly lower.

The dollar, which had taken a hammering early on, reached a low for the day as the upgrade in domestic product numbers encouraged investors to put money into riskier assets.

The Fed resolved to make no changes to its $300bn Treasury purchase plan, in part because prospects for the economy seemed to be improving. Although an expansion of such purchases might provide additional support, the effects of further asset purchases, especially purchases of Treasury securities, on the economy and on inflation expectations were uncertain, the minutes said.

Many worry whether the Fed has an “exit strategy” to unwind its aggressive easing strategy and reduce its bloated balance sheet. The meeting “generally agreed that the Federal Reserve either had already or could develop tools to remove policy accommodation when appropriate.”