Manufacturing, housing growth up in January, Federal Reserve says

By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, February 18, 2010

Economic growth continued in January as manufacturing and housing activity ramped up, according to data released Wednesday, but top Federal Reserve officials projected at their meeting last month that high unemployment will persist.

Factories raced to meet growing demand for goods last month after severely cutting back in the early and middle parts of last year, according to a Fed report, increasing production by nearly 1 percent. That was the seventh consecutive month of growth in manufacturing, a sector that has helped charge the economic recovery.

Builders also broke ground on more houses and apartments in January than economists generally expected. The Commerce Department reported that housing construction rose 2.8 percent -- a seasonally adjusted rate of 591,000 houses or apartments -- the fastest pace in six months.

But Fed policymakers said in an economic projection released Wednesday that although the economy would grow by up to 3.5 percent this year, the recovery would do little to put more people back to work. The central bank projected that unemployment would remain between 9.5 percent and 9.7 percent, essentially unchanged from the current 9.7 percent.

"When you can consider that the declines in employment have been so profound, it would take tremendous growth to get that back," said Steven C. Wieting, an economist at Citigroup. "Getting something that looks like a good growth clip can stabilize unemployment, but regaining all that was lost will take a lot of time."

As the economy chugs along, a summary of the Fed's January policymaking meeting showed that the central bank is considering more aggressive measures to withdraw the extraordinary support it has provided to the financial markets. Senior Fed officials, including Chairman Ben S. Bernanke, have made it clear that they are planning to gradually wind down various programs that have flooded the markets with money to keep interest rates low.

"They're getting their ducks in order, trying to educate us on how they're going to do this. The timing is still up in the air, but as every day passes, we're getting closer," said Raymond Stone of Stone & McCarthy Research Associates.

But a debate has raged inside the Fed over whether it should undertake measures to more aggressively remove money from the financial system. Some Fed officials would like the bank to begin selling some of the assets it has acquired -- such as mortgage investments -- as part of an effort to reduce the central bank's $2.2 trillion balance sheet. Some officials also want the Fed to move more quickly toward raising interest rates. They are concerned that by leaving so much money in the economy, even as it recovers on its own, the Fed risks spurring inflation.

Most Fed officials, however, have not subscribed to that view and think inflation will be tame for years to come. In January, the Fed decided not to raise interest rates or sell assets anytime soon.

The Fed's many options for withdrawing its extraordinary support are causing uncertainty in financial markets, according to some economists. In the past, all the Fed could do was increase or decrease interest rates. Now the Fed is contemplating a new set of tools to withdraw money from the economy, including a relatively new authority to pay interest on the funds that banks keep on reserve with the central bank.

"This time around, they've done so many other things there's confusion at the Fed about what to do, and the market is just as confused," said John Canally, an economist at LPL Financial. "There hasn't been much reaction in the markets to the Fed winding down so far, but that doesn't mean you're not going to get more significant swings."

Some Fed officials at the meeting expressed concern that the data they use to make judgments about the economy could be misleading. One Fed leader suggested that inflation, which has been moderate, might be being held down by the continued backlog of unsold houses. That would suggest that inflation in other parts of the economy might be more significant than thought.

A Fed policymaker also said that the unemployment rate might be inflated, as more people choose stay in the labor pool despite being unable to find jobs, after the government extended benefits several times. (The officials are not named in the minutes of the meeting released by the Fed.)

The minutes also raised the possibility that the Fed could increase the discount rate, at which banks take out emergency loans, in the near future. But the document made clear that such a step would be intended to wind down extreme policies meant to prop up the financial system during the crisis, not to presage a broader increase in interest rates, which could slow down the overall economy.

© 2010 The Washington Post Company