Fed offers bleak US economic outlook

NEW YORK, Feb 19 — The US Federal Reserve cut its economic outlook for 2009 yesterday and warned that the United States economy would face an "unusually gradual and prolonged" period of recovery as the country struggles to climb out of a deep global downturn.

In economic projections released by the central bank, the Fed's Open Market Committee said it expected that the economy would contract by 0.5 per cent to 1.3 per cent this year, that unemployment would rise to 8.5 to 8.8 per cent and that inflation would remain under greater pressure. Bleak economic data reflecting a sharpening slide in housing, trade, industrial production, spending and employment rates "more than offset" any potential impact from an economic stimulus plan, the Fed said, forcing it to cut its economic outlook.

"Financial markets continued to be strained over all, credit remained unusually tight for both households and businesses, and equity prices had fallen further," the Open Market Committee said in the report, which reflected the minutes of its Jan 27-28 meeting.

Economists said the Fed came closer than ever to setting an official target for inflation in its economic outlook when it projected that longer term inflation would be 1.7 to 2 per cent.

"The Fed has repeatedly told Congress they wouldn't move ahead on inflation targeting unilaterally," said Michael Feroli, United States economist at JPMorgan Economics. "The original practice of releasing three-year ahead inflation forecasts was a move toward soft inflation targeting. The new practice is a more definitive step towards hard inflation targeting."

On Tuesday, President Obama signed a US$787 billion (RM2.8 trillion) package of tax cuts and spending projects, saying it was necessary to stop the bleeding in the economy. He unveiled a US$75 billion plan yesterday that seeks to help as many as nine million families refinance their mortgages or avoid foreclosure.

The Fed released the minutes as its chairman, Ben S. Bernanke, defended the intense measures it had taken to try to revive frozen credit markets and restore confidence among borrowers and lenders. The Fed has expanded its balance sheet to US$2 trillion, demonstrating a willingness to print money to try to fight the downturn.

"The Federal Reserve has done, and will continue to do, everything possible within the limits of its authority to assist in restoring our nation to financial stability and economic prosperity as quickly as possible," Bernanke said in remarks at the National Press Club in Washington.

Members of the Federal Open Market Committee expect that the economy will ultimately rebound from a recession that began in December 2007, and will grow at a pace of 2.5 to 3.3 per cent two years from now. But even as the economy heals, the Fed expects unemployment to remain near 8 per cent.

The unemployment rate rose to 7.6 per cent last month as the faltering economy lost 598,000 jobs.

For the first time, the Fed also released projections of longer-term growth going beyond its normal one-to-three-year predictions. The committee members said that the American economy was expected to grow by 2.5 to 2.7 per cent annually over the next five to six years, and that unemployment rates would hover near 5 per cent in the longer term. — NYT