Fed forecast shows mixed signs
The Federal Reserve expects the economy this year will sink at a slower pace than it previously thought, but that unemployment will top 10 percent and remain high for the next few years, according to a new forecast released Wednesday.
The Fed now predicts the economy will shrink between 1 and 1.5 percent this year, an improvement from its forecast issued in May, when the Fed projected the economy would contract between 1.3 and 2 percent.
The upgrade comes from the expectation that the economy’s downhill slide in the first half of 2009 wasn’t as bad as previously thought. The Fed said the economy should start growing again in the second half of this year, although the pace is likely to be plodding.
In fact, most Fed policymakers said it could take "five or six years" for the economy and the labor market to get back on a path of full health in the long term. And most officials saw "the economy as still quite weak and vulnerable to further adverse shocks."
Against that backdrop, the Fed’s forecast for unemployment this year worsened individual health insurance plans. The central bank predicted the jobless rate could rise as high as 10.1 percent, compared with the previous forecast of 9.6 percent.
For 2010, the Fed predicted the economy would grow between 2.1 and 3.3 percent. That’s a slight upgrade from its old forecast of between 2 and 3 percent.
Still, it would mark a slow recovery and that will keep unemployment elevated well into 2011, the Fed said. Companies won’t be in any mood to ramp up hiring until they are certain that any recovery has staying power. Some Fed officials predicted the jobless rate could hover in the 8 percent range or as high as 9.2 percent in 2011.
On the inflation front, Fed policymakers bumped up their forecasts. The Fed expects inflation to rise between 1 and 1.4 percent in 2009 and between 1.2 and 1.8 percent next year.