Fed slashes 2009 US growth forecast, sets inflation goal
Posted: 19 February 2009 0407 hrs

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WASHINGTON: The Federal Reserve projected on Wednesday that the US economy will contract in 2009 and for the first time set a long-range inflation goal in a bid to strengthen monetary policy.

The Fed said it expects the world's largest economy to shrink 0.5 to 1.3 percent this year and anticipated am "unusually" prolonged recovery, according to the minutes of a Federal Open Market Committee (FOMC) meeting in January.

The prior estimate, in late October, predicted a range between a 0.2 percent contraction in gross domestic product (GDP) and a 1.1 percent expansion.

In 2008, the economy grew 1.3 percent despite being in recession the full year, according to government data.

Unemployment in 2009 was forecast to rise 8.5 to 8.8 percent and gradually fall to 6.7 to 7.5 percent in 2011.

Core inflation, excluding energy and food prices, would rise a weak 0.9 to 1.1 percent this year and only climb as high as 1.5 percent in the following two years.

"The information reviewed at the meeting indicated a continued sharp contraction in real economic activity," said the minutes of the Federal Open Market Committee's January 27-28 meeting, at which policymakers maintained the federal funds rate target at a historically low zero to 0.25 percent.

The committee had said it expected "exceptionally" low rates "for some time."

"Given the strength of the forces currently weighing on the economy, participants generally expected that the recovery would be unusually gradual and prolonged," the minutes noted.

The central bank said it saw the economy recovering in 2010 better than previously expected, at growth between 2.5 percent and 3.3 percent, up from a 2.3-3.2 percent forecast in October.

Growth in 2011 would accelerate to between 3.8 percent and 5.0 percent, significantly higher than 2.8-3.6 percent increase seen in the last forecast.

In a policy breakthrough, the Fed announced for the first time longer-range economic projections on GDP, unemployment and inflation.

The minutes said that Fed chairman Ben Bernanke and his policymakers had decided to provide the extended forecasts in the bank's quarterly economic reports which usually include data on a three-year horizon.

The longer-run projections represent the factors needed under "appropriate monetary policy and absent further shocks to the economy."

It defined appropriate monetary policy as "the future policy deemed most likely to foster outcomes satisfying the Federal Reserve's dual mandate of maximum employment and price stability."

The FOMC's longer-run forecasts were for GDP growth of 2.5 to 2.7 percent, unemployment at 4.8 to 5.0 percent, and inflation measured by the core consumer prices index, excluding food and energy, at 1.7 to 2.0 percent.

Most participants viewed the inflation rate of 2.0 percent as "consistent with the dual mandate," the Fed said.

Until now, the Fed had resisted setting a precise inflation target like other central banks, such as the European Central Bank, which also has a 2.0 percent inflation goal.

The US economy has been in recession since December 2007 stemming from a housing mortgage crisis at the epicentre of global turmoil.

The housing sector remains stuck in a steep downturn, consumer spending is falling, unemployment is on the rise, businesses are curtailing investment and foreign demand for US exports is weakening amid a steep global slowdown.

The Fed minutes noted a degree of uncertainty on projected growth and inflation data "exceeding historical norms." Nearly all participants saw downside risks to growth while all saw the risks to the inflation outlook as "either balanced or tilted to the downside."

Bernanke said on Wednesday in a speech in Washington that there was "little risk" of inflation to the US economy in the near future despite the central bank's massive efforts to ease credit and stabilise the ailing financial sector.

"Some observers have expressed concern that, by expanding its balance sheet, the Federal Reserve will ultimately stoke inflation," he said.

"At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time." - AFP/de