Bad news and good news from the Fed

The central bank said unemployment could hit 10% this year, but also said the economic decline could soon end and raised its growth forecast for 2010.

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By Chris Isidore, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- The unemployment rate could top 10% later this year, the Federal Reserve said Wednesday, but the central bank also said it believes the end of the recession could be in sight.

These forecasts were included in the minutes of the central bank's June 24 meeting. At that meeting the Fed left its key interest rate near zero percent, but said there were signs of a recovery in some sectors, including the financial markets.

According to the minutes, members of the Fed's rate-setting committee generally agreed that "the decline in [economic] activity could cease before long."

The current recession, which started in December 2007, is the longest downturn in the U.S. economy since the end of World War II.

Fed policymakers now believe that the unemployment rate will rise to between 9.8% and 10.1% in 2009 before declining modestly next year. The Fed had forecast in April that unemployment would top out in a range of 9.2% to 9.6% this year, but the rate reached 9.5% in June.

The Fed also issued a slightly more optimistic forecast for the economy. The Fed said the nation's gross domestic product, the broadest measure of economic activity, should decline by between 1% and 1.5% in 2009, compared to an earlier forecast of a drop of between 1.3% to 2%.

Policymakers also raised their forecast for GDP growth in 2010 and 2011, calling for growth of between 2.1% and 3.3% next year and growth of 3.8% to 4.6% the following year.

The Fed said in its forecast that it expected a "sluggish" recovery in the second half of this year, and that problems in the credit markets would allow for only gradual improvement in the economy next year.

The central bank also said most of its members believe it could take as long as five or six years for the economy to achieve a sustainable growth rate and for desired levels of unemployment and inflation to meet the central bank's objectives.

Rich Yamarone, director of economic research at Argus Research, said the Fed minutes showed that the central bank is still concerned about the state of the economy and any possible recovery.

He pointed out that even as the Fed talked of signs of a possible turnaround, it warned that the economy is "still quite weak and vulnerable to further adverse shocks." And he said some of those shocks, including rising job losses and the threat of bankruptcy at leading small business lender CIT Group (CIT, Fortune 500), still loom.

"I don't think the Fed is about to hang the 'Mission accomplished' sign," he said.

Brian Bethune, chief U.S. financial economist at Global Insight, agreed that the Fed is still very worried about the economy. He said the Fed is likely to keep rates low and maintain various programs designed to spur spending and lending for an extended period of time.

Bethune noted that the Fed is still expecting the unemployment rate to be in the 8.4% to 8.8% in 2011, well above the expected longer-term unemployment rate of 4.8% to 5%.

"There seems to be a Grand Canyon in between those two numbers," he said.

But David Wyss, chief economist at Standard & Poor's, said that it's also clear that the central bank is less worried now than it was at its April meeting.

"They've shifted to a more neutral stance from a downbeat one," he said. "That's an important change." To top of page

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