Officials at the Federal Reserve lowered their projections for US unemployment in the coming years, according to the minutes of the most recent meeting of the Federal Open Market Committee.
The minutes, released on Tuesday, showed officials expect the unemployment rate to range from 9.3 per cent to 9.7 per cent in the fourth quarter of 2010, compared with a previous projection — made in June — for a jobless rate of 9.5 to 9.8 per cent in the period.
Fed officials raised their forecast for economic growth in 2010 to a range of 2.5 per to 3.5 per cent, compared with a previous projection of 2.1 to 3.3 per cent. Their outlook for inflation was unchanged, in a range of 1 to 1.5 per cent.
Other highlights, emphasis FT Alphaville’s:
Looking beyond 2009, the contours of the participants’ outlook for economic activity and inflation were broadly similar to those in their June projections, with the pace of the economic recovery expected to be restrained by household and business uncertainty, weak labor market conditions, and slow waning of tight credit conditions in the banking system. Most participants anticipated that about five or six years would be needed for the economy to converge fully to a longer-run path characterized by a sustainable rate of output growth and by rates of unemployment and inflation consistent with their interpretation of the Federal Reserve’s objectives.
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Investor sentiment toward the banking sector appeared to deteriorate over the intermeeting period. Bank share prices fell, with equity prices for large banks declining more than those for regional and smaller banks. Credit default swap spreads for large bank holding companies were about flat, but they widened for regional and smaller banking organizations. Market participants reportedly remained concerned about the earnings prospects for banks in an environment of weak economic activity and rising loan losses.
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A number of factors were expected to support near-term growth: Business inventories were being brought into better alignment with sales, and the pace of inventory runoff was slowing; activity in the housing sector appeared to be turning up, and house prices seemed to be leveling out or beginning to rise by some measures; consumer spending appeared to be rising even apart from the effects of fiscal incentives to purchase autos; the outlook for growth abroad had improved since earlier in the year, auguring well for U.S. exports; and U.S. and global financial market conditions, while roughly unchanged over the intermeeting period, were substantially better than earlier in the year.
Above-trend output growth in the third quarter was a welcome development. Moreover, the upturn in real GDP appeared to reflect stronger final demand and not just a slower pace of inventory decumulation. While these developments were positive, participants noted that it was not clear how much of the recent firming in final demand reflected the effects of temporary fiscal programs to support the auto and housing sectors, and some participants expressed concerns about the ability of the economy to generate a self-sustaining recovery without government support.
Nonetheless, participants expected the recovery to continue in subsequent quarters, although at a pace that would be rather slow relative to historical experience, particularly the robust recoveries that followed previous steep downturns. Such a modest pace of expansion would imply only slow improvement in the labor market next year, with unemployment remaining high. Indeed, participants noted that business contacts continued to report plans to be cautious in hiring and capital spending even as demand for their products increased.
Related links:
US GDP growth revised down to 2.8% – FT
Chicago Fed president sees 10.5% jobless peak – FT
Fed minutes reveal “considerable uncertainty” post-stimulus – FT Alphaville