Risk & Compliance

Fed Sees Economic Slide, Moving Target for Stimulus

Deteriorating U.S. numbers, including the first contraction in the overall economy in 18 years, are forecast for 2009.
Roy HarrisFebruary 18, 2009

The Federal Reserve is ratcheting up its projection for U.S. economic deterioration this year, now seeing an unemployment rate of between 8.5 and 8.8 percent by year-end, rather than the projections three months ago of 7.1 to 7.6 percent. The Fed also now sees a contraction of the overall U.S. economy of 0.5 to 1.3 percent, sharply worse than previous forecasts that saw anywhere from 0.2-percent shrinkage to a 1.3-percent expansion.

According to the Associated Press analysis of the Wednesday report, the last time the economy showed a full-year contraction was 1991, when the level of shrinkage was 0.2 percent. The new projections were presented by the Federal Open Market Committee at its Jan. 27-28 meeting.

In the forecasts, the downward revisions reflected ” the implications of weaker-than-anticipated economic data releases (which) more than offset an upward revision to the staff’s assumption of the amount of forthcoming fiscal stimulus.” In addition to deteriorating labor-market results, industrial production “declined steeply, and household and business spending fell more than anticipated. Sales and starts of new homes remained on a steep downtrend. Foreign demand also was weaker than expected. Financial markets continued to be strained overall, credit remained unusually tight for both households and businesses, and equity prices had fallen further,” the Fed’s report said.

All but a few of the participants in the meeting “saw the risks to growth as tilted to the downside,” according to the meeting minutes attached to the Fed news release. Because of the meltdown in financial markets, “they saw a significant risk that the economic recovery could be delayed and initially quite weak.”

Longer-run projections were presented as well, focusing on output growth, unemployment, and inflation foreseen for 2010 and 2011, as well as this year. The projections reflect “the rate to which each variable would be expected to converge under appropriate monetary policy and absent further shocks to the economy.”

The “central tendency of FOMC participants’ longer-run projections,” according to the Fed report, were growth in real gross domestic output of 2.5 to 2.7 percent, with 4.8 to 5 percent unemployment, and 1.7 to 2 percent inflation.

At the January meeting, the FOMC kept the interest rate at its previous range of zero to 0.25 percent.