|02-18-2009, 12:43 PM||#1|
Ring of Famer
Join Date: Jun 2006
Fed sees deepening economic pain this year
Shrinking output and substantial unemployment rate until 2011
WASHINGTON - The Federal Reserve on Wednesday sharply downgraded its projections for the country’s economic performance this year, predicting the economy will actually shrink and unemployment will rise higher.
Under the new projections, the unemployment rate will rise to between 8.5 and 8.8 percent this year. The old forecasts, issued in mid-November, predicted the jobless rate would rise to between 7.1 and 7.6 percent.
The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent.
The bleaker outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. All of those negative forces have plunged the nation into a recession, now in its second year.
“Given the strength of the forces currently weighing on the economy,” Fed officials “generally expected that the recovery would be unusually gradual and prolonged,” according to documents on the Fed’s updated economic outlook.
Against that backdrop, unemployment — now at 7.6 percent, the highest in more than 16 years — will keep climbing and stay elevated for quite some time, the Fed predicted.
Fed officials anticipated that unemployment would remain “substantially” higher than normal at the end of 2011 “even absent further economic shocks.”
Separately, in an address to the National Press Club on Wednesday, Federal Reserve Chairman Ben Bernanke pledged anew Wednesday to do everything in his power to lift the country out of recession, while defending the extraordinary steps the Fed has taken to fight the worst credit and financial crisis since the 1930s.
The central bank has slashed a key interest rate to record lows and has launched a series of radical programs in hopes of getting credit — the economy’s oxygen — to flow more freely again to American consumers and businesses, and stabilize Wall Street. Such relief would help revive the U.S. economy, which has been mired in recession since December 2007.
“Recent economic statistics have been dismal, with many economies, including ours, having fallen into recession,” Bernanke said. “In the United States, the Federal Reserve has done, and will continue to do, everything possible within the limits of its authority to assist in restoring our nation to financial stability and economic prosperity as quickly as possible.”
The Fed has been exploring new tools — as well as expanding existing programs — to provide further economic and financial relief, although Bernanke didn’t provide any new details on Wednesday.
With all the Fed’s programs to provide loans or buy debt, its balance sheet has mushroomed to just under $2 trillion, from around $900 billion in September.
Critics worry the Fed’s actions have the potential to put ever-more taxpayers’ dollars at risk, spur inflationary pressure in the future and encourage “moral hazard,” where companies feel more comfortable making high-stakes gambles because the government will rescue them.
Bernanke, however, sought to downplay some of those concerns.
“The credit risk with our nontraditional policies is exceptionally low,” he said, adding that when the economy is on the mend, the Fed’s programs can be quickly reversed “to avoid risks of future inflation.”
The great bulk of the Fed’s lending is generally short term and backed by more than ample assets, Bernanke said.
In other controversial moves, the Fed last year provided financial backing for JPMorgan Chase’s take over of Bear Stearns, and bailed out insurer American International Group. Although this carries “more risk than our traditional activities,” Bernanke said the Fed intends over time to sell the assets it holds from those bailouts in a way that maximizes the return to taxpayers.
The Fed chief also repeated a pledge — made last week — to keep Americans better informed about its efforts to ease credit and financial problems.
On that front, the central bank is developing a new Web site that will provide detailed information on its efforts. The Fed hopes to have the site operational in the coming days.
The Fed’s No. 2 official, vice chairman Donald Kohn, also is leading a committee to review the central bank’s disclosure policies related to its lending programs and its balance sheet, which outlines its efforts to ease credit problems by providing loans and buying debt.
“The presumption of the committee will be that the public has a right to know,” Bernanke said.
In another move to provide Wall Street and Main Street with better insights into the Fed’s thinking about the economy, Bernanke said the central bank will start publishing longer-term projections on economic activity, unemployment and inflation beyond the three years now provided.
I expected this to last through this Year, but 2011? Grab your Helmet-