U.S. Fed depicts slightly more optimistic recovery picture

08:12, February 17, 2011      

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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.

STRONGER RECOVERY

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 rapidly."

"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 diminished.

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.

CHALLENGES AHEAD

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 risks.

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 market.

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 sectors.

As of the closely watched unemployment situation, the central bank's latest outlook foresees little improvement.

"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 percent.

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 internationally.

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

Source: Xinhua

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