Fed sees no economic recovery until next year

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Fed sees no economic recovery until next year

Post  dwc43 on Thu Apr 09, 2009 10:26 am

Fed sees no economic recovery until next year


Fed sees no economic recovery until next year AFP/File – The US Federal Reserve building is seen on April 2, 2009 in Washington, DC. The Federal Reserve has lowered …

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by Veronica Smith Veronica Smith – Wed Apr 8, 6:05 pm ET

WASHINGTON (AFP) – The Federal Reserve has lowered its outlook on the recession-mired US economy, seeing no glint of recovery until next year, according to minutes of a central bank meeting released Wednesday.

Despite massive interventions by the Fed and other government bodies to jump-start the moribund economy and unblock tight credit, policymakers at a March meeting viewed grimmer projections than those made two months earlier.

"Real GDP (is) expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end," the minutes of the Federal Open Market Committee (FOMC) said.

FOMC chairman Ben Bernanke and his policymakers at the March 17-18 meeting stared down grim staff-prepared forecasts that were sharply lower than the outlook prepared for the previous January FOMC meeting.

In January, the economy was expected to recover "gradually" during the second half of 2009 albeit it would shrink between 0.5 percent and 1.3 percent for the full year.

The central bank had also predicted growth would accelerate to between 2.5 percent and 3.3 percent for 2010. Critics at the time had said the forecasts were overly optimistic.

"Nearly all meeting participants said that conditions had deteriorated relative to their expectations at the time of the January meeting," the latest FOMC minutes said.

The slowdown was broad, across sectors, and included large declines in equity prices, a further drop in house prices, mounting job losses that threatened to further depress consumer spending, and weakening business capital spending.

Policymakers noted "the apparent sharp fall" in foreign economies that was hitting US exports, reducing their supporting role for the US economy in the near term.

They also in particular highlighted significant uncertainty about the prospects for the economy, which slid into recession in December 2007.

Most participants at the meeting saw "predominating" downside risks in the near term, mainly due to potential "adverse feedback effects" from rising unemployment weighing on consumer spending and mounting losses at financial institutions further tightening credit conditions.

At the meeting, policymakers voted to unanimously hold the Fed's base interest rate at a historically low range of zero to 0.25 percent, where it has been since mid-December.

They also announced a 1.15-trillion-dollar initiative to unblock frozen credit, including ramped-up purchases of mortgage-backed securities and the launch of program to buy long-term Treasury bonds.

The latest FOMC minutes signal the Fed may need to do more to boost the economy, analysts said.

"The minutes served as a reminder to investors that economic conditions remain weak and that downside risks predominate the near term," Briefing.com analysts said in a note to clients.

Brian Bethune, chief US financial economist at IHS Global Insight, suggested the Fed should work on raising demand for its new Term Asset-Backed Securities Loan Facility (TALF), intended to unlock credit flows for auto loans and credit cards.

"The Fed needs to work with Congress to iron out some of the wrinkles that are impeding a more rapid uptake of investors and borrowers within this program. This clearly needs to be a short-term priority," Bethune said.

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