The Wall Street Journal
11/23/10
Federal Reserve officials downgraded their outlook for the U.S. economy at their early November meeting, projecting that the jobless rate could exceed 8% for two more years and that it won't return to its former vitality for five years or more.
Minutes of a Nov. 2-3 meeting and a previously undisclosed Oct. 15 video conference also revealed that Fed officials considered steps beyond the Fed's controversial decision to buy $600 billion more U.S. Treasury debt to lower long-term interests rates to boost growth—including setting a cap on longer-term interest rates, a move which hasn't been tried since the 1950s.
Federal Reserve officials downgraded their assessment of the U.S. economy at their last meeting three weeks ago as they debated the benefits and costs of a new bold step to support the recovery. Jon Hilsenrath has details from Washington.
The minutes offer some detail on the Fed's decision to buy more bonds, a divisive one inside the Fed and one widely criticized outside the Fed. "Somewhat more than half of the participants judged that, in the absence of any additional shocks to the economy, the economy would converge fully to its longer-run rates of output growth, unemployment, and inflation within about five or six years," the minutes showed. "The rest indicated that it could take longer for unemployment to fall back to its longer-run rate or for inflation to rise back to the level they deemed desirable in the longer run."
Meetings of the Fed's decision-making body—the Federal Open Market Committee—include the presidents of the 12 regional Fed bank and the members, currently six, of the Fed board in Washington. The bulk of that group projected unemployment, now at 9.6%, would descend slowly to between 8.9% and 9.1% at the end of 2011, between 7.7% and 8.2% in 2012 and between 6.9% and 7.4% in 2013, a grimmer outlook than the Fed's last official projections in June.
Fed official downgraded their growth projection to between 3% and 3.6% next year, compared to the 3.5% to 4.2% estimate it made in June. Fed officials forecast 2.5% growth in 2010, lower than the June prediction of between 3% and 3.5%. Though Fed critics warn its bond-buying program could spur inflation, the Fed projected inflation would remain below its informal objective of 2% through the forecast period.
The downwardly revised projections indicate the Fed might keep interest rates low for several years and suggests it is likely to follow through on plans to buy $600 billion in Treasury securities in the months ahead. The Fed said it stands ready to buy more securities if the forecast doesn't improve or deteriorates.
"They clearly indicated that even if the improved recent tone of the [economic] data continues and growth surprises to the upside next year it will not trigger any quick reversal in policy," Ted Wieseman, a Morgan Stanley economist, said in a research note.
The Fed's bond-buying has been attacked by GOP lawmakers and foreign officials, who said it could weaken the U.S. dollar and bring high inflation. Even though Fed officials voted 10-1 to support the move, strongly advocated by Chairman Ben Bernanke, the minutes showed that several worried about both those risks. "Some participants noted concerns that additional expansion of the Federal Reserve's balance sheet could put unwanted downward pressure on the dollar's value," the minutes showed. Several officials saw a risk it could "cause an undesirably large increase in inflation."
Fed officials held an unusual video conference on Oct. 15, a few hours after Mr. Bernanke laid out his thinking on inflation in a speech in Boston.
Officials discussed whether the Fed should target some long-term interest rate, in addition to holding its target for overnight rates near zero. In the 1940s and 1950s, the Fed pinned long-term rates below 2.5%. Though the Fed didn't take action in this direction, the discussion suggests the notion could come up later if the economy worsens.
Officials also discussed the pros and cons of adopting a firm numeral objective for inflation and considered holding occasional press briefings to explain the rationale for its decisions. Unlike the European Central Bank, which routinely gives press briefings after policy meetings, such a move would be a departure for the Fed.
Federal Reserve Unemployment Forecast:
- 2010: 9.5% to 9.7%
- 2011: 8.9% to 9.1%
- 2012: 7.7% to 8.2%
- 2013: 6.9% to 7.4%
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