Economy will shrink, joblessness rise in '09, Fed says

The Baltimore Sun

WASHINGTON -The U.S. economy is weakening further, and a gradual recovery isn't likely until the second half of the year, members of the Federal Reserve's monetary policymaking committee agreed at its meeting last month, according to minutes released yesterday.

The updated forecasts predict that the economy will shrink 0.5 percent to 1.3 percent this year, then grow about 2.5 percent to 3.3 percent in 2010. The unemployment rate would likely rise to 8.5 percent to 8.8 percent this year before gradually declining during the next two years.

The Federal Open Market Committee also said at the Jan. 27-28 meeting that consumer prices would likely rise 0.3 percent to 1 percent this year. At that meeting, the Fed held its interest-rate target near zero and promised that it would "employ all available tools" to restore the economy to growth.

Many of the members of the committee saw some risk of excessively low inflation for a protracted period, the minutes said, and a few even warned of deflation - a general decline of prices and wages.

The outlook is considerably worse than in October, when committee members thought the economy might grow as much as 1.1 percent in 2009.

In their analysis of the economy's near-term performance, most committee members said the economy was worsening, although they saw "modest signs of improvement" in some financial markets. They said the fiscal stimulus was "necessary and important," though they had questions about some details.

"A gradual recovery in U.S. economic activity would begin during the third or fourth quarter of the year," they agreed. However, they were "quite uncertain about the outlook."

The policymakers saw few bright spots. Companies are cutting jobs; consumers are reducing spending.

The officials saw "no indication that the housing sector was beginning to stabilize," and a number of them expressed "concern" that commercial real estate would deteriorate sharply in the months ahead.

Business investment was expected to contract rapidly.

The members of the committee said they were "surprised by the speed and magnitude of the slowdown" in other countries' economic growth, and they said they do not expect a quick rebound in global expansion.

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