News from The Globe and Mail
Worst is yet to come, Fed acknowledges
U.S. economy expected to decline 'sharply' in 2009; jobless rate to rise 'significantly'
00:00 EST Wednesday, January 07, 2009
WASHINGTON -- The world's largest economy now faces an even deeper downturn than previously forecast, with soaring unemployment in 2009 and perhaps years of trillion-dollar deficits.
Ben Bernanke and his Federal Reserve Board now expect economic conditions to worsen substantially this year with no hint of recovery until 2010, according to minutes released yesterday of the Fed's Dec. 16 monetary policy meeting.
The sobering prediction comes as U.S. president-elect Barack Obama acknowledged that the country must go much deeper into debt to dig itself out of an economic hole.
"We're already looking at a trillion-dollar budget deficit, or close to a trillion-dollar budget deficit," he told reporters yesterday after a meeting with his top economic officials in Washington. "Potentially we've got trillion-dollar deficits for years to come."
Like most countries, the United States is facing plunging tax revenues and major new financial demands, including bank bailouts, loans to the ailing auto makers and a proposed $775-billion (U.S.) package of tax breaks and infrastructure spending.
In December, the Fed cut its key interest rate to near zero and signalled it would keep it there for some time, while exploring new ways to flush the fragile financial system with more cash. The 10-member policy-making committee, which Mr. Bernanke heads, concluded the worst is probably still ahead, including accelerating economic contraction in the first half of 2009.
Fed officials projected that gross domestic product would decline "sharply" this year and won't resume solid and sustained growth until 2010.
The unemployment rate should rise "significantly" into 2010, the Fed said, to a rate even higher than it projected in late October.
Aluminum producer Alcoa Inc. underscored the looming jobs problem, announcing that it's girding for a prolonged recession by cutting production and eliminating 13,500 jobs, or 13 per cent of its work force.
The U.S. Labour Department is poised to release its employment report for December on Friday. Many economists expect the jobless rate will hit a 14-year high of 7 per cent, up from 6.7 per cent in November, while the economy sheds another half a million jobs.
The National Bureau of Economic Research, the official arbiter of economic cycles, recently concluded that the United States slipped into recession in December, 2007. The economy shrank by an annualized 0.5 per cent in the third quarter, but most economists expect the decline to be even larger in the final three months of 2008.
The Fed members also talked about the possibility of setting explicit targets for inflation, as well as for the money supply, eventually opting to do neither for the time being.
With the bank's key interest rate now set at between zero and one quarter of 1 per cent, the Fed is shifting its attention to so-called quantitative easing. Put simply, it is creating money to drive down longer-term interest rates, rather than indirectly trying to control the money supply by lowering the price of credit. The Fed has already taken a step in that direction by making hundreds of billions available to banks, brokerages and insurers. And at the December meeting, the bank said it stands ready to add substantially to its portfolio of bonds issued by mortgage lenders Fannie Mae and Freddie Mac and may also directly buy U.S. Treasury bills.
"The available evidence indicated that such purchases would reduce yields on those instruments, and lower borrowing costs for a range of private borrowers, although participants were uncertain as to the likely size of such effects," the minutes stated.
The Fed is eager to show that it hasn't run out of ammunition, even after taking interest rates to zero. And while it isn't yet ready to set specific targets for the money supply, it's looking at ways to show investors more clearly how it's working behind the scenes to make credit more available to businesses and consumers.
The minutes suggest "some form of quantitative targeting will remain under serious consideration in the future," said strategist Millan Mulraine of Toronto-Dominion Bank.
"There's much more on the Fed's quantitative easing front to come," BMO Nesbitt Burns economist Michael Gregory said in a research note.
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