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Washington: The Federal Reserve doesn’t expect the recovery will be strong enough to quickly drive down the jobless rate, and acknowledged its efforts to keep the rebound going could feed a new speculative bubble. Record-low interest rates “could lead to excessive risk-taking in financial markets,” according to documents released on Tuesday of the Fed’s closed-door meeting earlier this month. It also could cause consumers, investors and businesses to worry about inflation taking off.
Although Fed officials saw the current likelihood of that as “relatively low,” they pledged to “remain alert to these risks.” At the November 3-4 meeting, Fed chairman Ben Bernanke and his colleagues kept the target range for its bank lending rate at zero to 0.25%. Fed policymakers also pledged to hold rates at such super-low levels for an “extended period,” to ensure the recovery gains traction.
Most analysts predict that means rates will stay where they are through the rest of this year and into part of 2010. On the economy, the Fed expects the unfolding recovery will be gradual, as modest growth keeps the nation’s unemployment rate elevated over the next several years.
Most Fed policymakers said it could take “five or six years” for the economy and the labor market to be consistently healthy. In updated economic projections, the Fed said the economy’s contraction for all of this year won’t be as deep as it thought in a forecast released in the summer. That’s because the second half of this year is shaping up better than anticipated.
Under a range of new projections, the economy will shrink 0.5% or be flat this year. Growth next year should turn out slightly better than the Fed previously projected- ranging from 2 to 4%— up from 0.8 to 4%. But that won’t be robust enough to quickly drive down the unemployment rate, which now stands at 10.2%. It’s only the second time in the post-World War II period the rate has topped 10%.
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