Fed sees no economic recovery this year

Source: cnnfn.com written by Veronica Smith (AFP)

WASHINGTON (AFP) – The Federal Reserve no longer sees signs of recovery this year from a prolonged recession and only weak growth in 2010, minutes of a policy-setting meeting said.

Despite massive interventions by the Fed and other government bodies to jumpstart the moribund economy and unblock tight credit, policymakers at a March meeting viewed grimmer projections than those made two months earlier.

The United States, among the earliest to enter recession after financial turmoil stemming from a home mortgage meltdown, could begin to grow again "slowly" next year despite numerous constraints, according to Fed projections.

"Real GDP (is) expected to flatten out gradually over the second half of this year and then to expand slowly next year," the minutes of the Federal Open Market Committee (FOMC)'s March 17-18 meeting said.

The central bank anticipated the recovery "as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end."

The United States plunged into recession in December 2007 after a home mortgage meltdown triggered a financial crisis that spread around the world, slashing economic growth.

FOMC chairman Ben Bernanke and his policymakers at the March meeting stared down grim staff-prepared forecasts that were sharply lower than the outlook prepared for the January FOMC meeting.

In January, the economy was expected to recover "gradually" during the second half of 2009 albeit shrinking between 0.5 percent and 1.3 percent for the full year.

The central bank had also predicted growth would accelerate to between 2.5 percent and 3.3 percent for 2010. Critics at the time had said the forecasts were overly optimistic.

"Nearly all meeting participants said that conditions had deteriorated relative to their expectations at the time of the January meeting," the latest FOMC minutes said.

The slowdown was broad, across sectors, and included large declines in equity prices, a further drop in house prices, mounting job losses that threatened to further depress consumer spending and weakening business capital spending.

Policymakers noted "the apparent sharp fall" in foreign economies that was hitting US exports, reducing their supporting role for the US economy in the near term.

They also highlighted significant uncertainty about the prospects for the economy, which slid into recession in December 2007.

Most meeting participants saw "predominating" downside risks in the near term, mainly due to potential "adverse feedback effects" from rising unemployment weighing on consumer spending and mounting losses at financial institutions further tightening credit conditions.

"All told, this suggests that third-quarter and fourth-quarter GDP results aren't likely to show any sort of recovery, while the unemployment rate could breach the upper range of the FOMC's projections of 9.2 percent, and perhaps reach double-digits," said Terri Belkas at Forex Capital Markets.

In a speech in Tokyo Wednesday, Dallas Federal Reserve chief Richard Fisher said that the economy probably contracted in the first three months of the year at an annual pace "very similar" to the previous quarter, when GDP shrank 6.3 percent.

Policymakers in March voted to unanimously hold the Fed's base interest rate at a historically low range of zero to 0.25 percent, where it has been since mid-December.

They also announced a 1.15-trillion-dollar initiative to unblock frozen credit, including ramped-up purchases of mortgage-backed securities and the launch of program to buy long-term Treasury bonds.

Brian Bethune, chief US financial economist at IHS Global Insight, suggested the Fed should try to encourage demand for its new Term Asset-Backed Securities Loan Facility (TALF), intended to unlock credit flows for auto loans and credit cards.

"The Fed needs to work with Congress to iron out some of the wrinkles that are impeding a more rapid uptake of investors and borrowers within this program. This clearly needs to be a short-term priority," Bethune said.