U.S. Fed depicts slightly more optimistic recovery picture

Published: 17/02/2011 05:00



The U.S. Federal
Reserve expressed slightly more optimistic expectation of the U.S. economy,
saying the recovery “was on a firmer footing”, but high unemployment remains a
key challenge of the country.


The U.S. economy is
expected to grow up to 3.9 percent this year, said the Fed in the minutes
released on Wednesday by the Federal Open Market Committee (FOMC) meeting held
in January 25-26.

Fed officials “generally
expressed greater confidence that the economic recovery would be sustained and
would gradually strengthen over coming quarters,” the document noted.

Members of FOMC, the
interest rate policy making body of the central bank say in an updated forecast
that they think the economy will grow between 3.4 percent and 3.9 percent in
2011. That’s an upward revision from their November forecast, which predicted
that gross domestic product will grow 3 percent to 3.6 percent.

“Consumer spending,
business investment, and net exports increased more strongly at the end of 2010
than expected earlier,” the Fed said. “Industrial production also expanded more

“Spending by households
picked up noticeably in the fourth quarter; business outlays continued to grow
at a moderate pace,” the Fed noted.

The Fed said that
conditions in labor markets continued to improve gradually. And conditions in
financial markets improved somewhat further over the intermeeting period.

In addition, fiscal
stimulus measures approved by Congress after November were expected to provide
further impetus to household and business spending in 2011.

The Fed predicted that the
GDP will expand 3.5 percent to 4.4 percent in 2012 and 3.7 percent to 4.6
percent in 2013. Both those forecasts were little changed from November.

The minute showed that
participants generally agreed that the downside risks to their forecasts of both
economic growth and inflation–as well as the odds of a period of deflation–had

Fed staff continued to
project that increases in core inflation would remain subdued in 2011 and 2012.

During the monetary policy
decision making meeting last month, the Fed decided to keep the federal funds
rate at historic low level 0 to 1/4 percent target range.


Although the Fed policy
makers generally saw the risks to their outlook for economic growth and
employment as having become broadly balanced, they continued to see significant

On the downside, the Fed
policy makers remained worried about the possible effects of spillovers from the
banking and fiscal strains in peripheral Europe, the ongoing fiscal adjustments
by U. S. state and local governments, and the continued weakness in the housing

Most participants
continued to anticipate that the recovery in economic activity was likely to be
restrained by a variety of economic factors, including still-high unemployment,
modest income growth, lower housing wealth, high rates of mortgage foreclosure,
elevated inventories of unsold homes, and tight credit conditions in a number of

As of the closely watched
unemployment situation, the central bank’s latest outlook foresees little

“Modest gains in
employment continued, and the unemployment rate remained elevated,” Fed
officials said, as the Fed predicted the unemployment rate would be stuck at
around 8.8 to 9.0 percent this year.

That is only slightly
lower than the 8.9 to 9.1 percent predicted in November.

“Participants anticipated
that a gradual but steady reduction in the unemployment rate would accompany the
pickup in the pace of the economic expansion over the next three years.”

By the time of the 2012
presidential elections, the Fed predicted unemployment would be 7.6 to 8.1

Unemployment rate, now at
9 percent, dropped 0.4 percentage points from December 2010.

In order to keep fostering
the recovery, the central bank decided to maintain its existing policy of
reinvesting principal payments from its securities holdings and intended to
purchase 600 billion U.S. dollars of longer-term Treasury securities by the end
of the second quarter of 2011.

But the government bond
purchasing program has been widely criticized both domestically and

They argued that the Fed
policy may push up the inflation and cause spillover effect to other countries.


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