Fed predicts weak recovery for several years

chart_fed_outlook.top.gif By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- The Federal Reserve slashed its outlook for the U.S. economy for this year and 2011 and projected that it could take several years for the economy to return to health.

According to minutes from the Fed's November 3 meeting released Tuesday, more than half of the central bank's policymakers thought it would take about five or six years for unemployment, growth and inflation to return to more normal levels. Other Fed members warned the full recovery could take even longer than that.

The much weaker forecast is the major reason that policymakers decided earlier this month to announce a plan to try and jumpstart growth by pumping an additional $600 billion into the economy through the purchase of long-term bonds. That plan, known as quantitative easing, has been criticized by several economists, politicians and foreign central bank officials.

The Fed now expects the economy to grow between 2.4% to 2.5% this year, compared to an earlier forecast of growth between 3.0% and 3.5%.

The Commerce Department reported Tuesday that the economy grew at a 2.5% rate in the third quarter, up from 1.7% in the second quarter but well below the increase of 3.7% in the first three months of the year.

The Fed also trimmed its 2011 forecast to growth of between 3% and 3.6%. Its earlier estimate was for growth of 3.5% to 4.2%.

The central bank also said the unemployment rate is now expected to average out between 9.5% and 9.7% this year. The jobless rate was 9.6% in October.

And the Fed now forecasts unemployment will only fall to between 8.9% to 9.1% in 2011, well above the 8.3% to 8.7% unemployment rate it previously predicted for 2011.

The Fed also indicated it expects unemployment to only drop to between 6.9% to 7.4% by 2013. To put that into context, the unemployment rate was 4.6% in 2007, the last year before the recession.

The central bank also maintained that inflation should not be a problem for the foreseeable future. Prices for consumer goods are expected to rise a little faster than in the Fed's previous estimate, but still well less than 2% through at least 2012.

The Fed has stated that price increases are now judged to be too low to maintain its goal of price stability. But some policymakers at the Fed have expressed concern that the steps the central bank is taking to stimulate growth could lead to higher inflation down the road. To top of page

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