Fed Predicts Full Economic Recovery Could Take Years
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Wednesday, May 20, 2009; 2:56 PM
The economy could begin to pull out of the recession later this year but a full recovery could take as long as six years, according to a forecast issued today by the Federal Reserve.
The projections were grimmer than those issued by the Fed in January. Yet, they still reflected a growing sentiment inside and outside the central bank that the economy has turned a corner and is declining at a more moderate pace than in the fall.
Fed leaders predicted the economy would shrink this year and then expand at an annualized rate of between 2 and 3 percent in 2010, before gaining further momentum in 2011. However, Fed leaders anticipated labor market conditions will be weak for some time. They projected unemployment to rise to between 9.2 and 9.6 percent and stay in that range through the end of next year before leveling off at between 7.7 and 8.5 percent in 2011. As of April, the unemployment rate was 8.9 percent.
The forecast was included in minutes of the April meeting of the Fed's policymaking arm, the Federal Open Market Committee. Having already slashed rates close to zero, Fed leaders spent the two-day meeting assessing the effectiveness of their earlier decision to buy up mortgage-backed securities, long-term Treasury bills and debt issued by mortgage finance giants Fannie Mae and Freddie Mac.
They concluded the purchases had had the intended effect of driving down mortgage rates and helping revive the economy and said they were prepared to buy more long-term Treasuries in order to "spur a more rapid pace of recovery."
The Fed's unconventional strategy, also known as quantitative easing, has stirred fears that the central bank will not be able to withdraw the unprecedented amount of money it has injected into the economy quickly enough to prevent a steep rise in inflation. Its balance sheet has ballooned to $2.2 trillion, the minutes showed.
In their forecast, however, officials said they expect inflation to stay well within the Fed's unofficial target of 2 percent for years to come because of the weak recovery.
