According to members of the US Federal Reserve, the American economy faces four to six years of sluggish growth … a period of downturn longer than has been forecast by any other economic policy setting group around the world.
The minutes of the latest meeting of the Fed’s key policy group, the Open Markets Committee (which sets interest rates), show that at best the US economy can expect four years of below-trend growth, high unemployment and no real worries about inflation.
The Fed indicated it expects gross domestic product to decline by 0.5% to 1.3% this year, significantly worse than the October forecast of -0.2% to positive 1.1% growth. Unemployment is forecast to rise from 8.5% to 8.8%. GDP fell by 3.8% in the fourth quarter of 2008, and unemployment hit 7.6% last month, a 17-year high.
According to the minutes, some members of the Open Markets Committee don’t see any relief on unemployment until well into 2011.
In the outlook section of the forecast, the minutes read:
Looking further ahead, participants’ growth projections had a central tendency of 2.5 to 3.3 percent for 2010 and 3.8 to 5.0 percent for 2011. Participants generally expected that strains in financial markets would ebb only slowly and hence that the pace of recovery in 2010 would be damped. Nonetheless, participants generally anticipated that real GDP growth would gain further momentum in 2011.
FOMC participants viewed the outlook for economic activity and inflation as having weakened significantly since last October, when their last projections were made.
Participants projected that real GDP would contract this year, that the unemployment rate would increase substantially, and that consumer price inflation would be significantly lower than in recent years.
Given the strength of the forces currently weighing on the economy, participants generally expected that the recovery would be unusually gradual and prolonged:
All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and and unemployment and by an appropriate rate of inflation (my bolding).
Participants generally judged that their projections for both economic activity and inflation were subject to a degree of uncertainty exceeding historical norms. Nearly all participants viewed the risks to the growth outlook as skewed to the downside.
It’s not Fed policy and there was certainly no sign of a mention of this in a separate public speech by chairman Ben Bernanke today. But it does indicate how gloomy some of the major policy setters in America’s most important financial institution have become.
And it’s an important point because without a strongly rebounding American economy, we won’t get a bounce elsewhere. If America’s rebound is slow and tepid, then we face a much slower recovery here and around the world.
No-one in Australia, from the Government to the Reserve bank, is thinking along these lines, but if the Americans are right to any degree, the recovery here expected towards the end of 2009 and into 2010 will fade away.
Stimulus packages are a piece of theatre created by our need for economic stimulus, not because there is any such thing. Its like grass. If you get hungry enough, and desperate enough, you will convince yourself that grass is food. Although this may serve to alleviate some of your hunger, your hunger will not make grass any more effective as a nutrient. Similarly, repeating the words “stimulus” before “package” will not make the package stimulatory. It will not work, because it cannot work. Its just that reality is so very nasty at the moment that we can’t face that possibility.
What an idiotic lead story.
Why not quote some economists ( or the same ones ) from 12 to 18 months ago and see how right they’ve got it so far and with that headline Glen should go work for A Current Affair or 6.30 Report.
This is a nice example of ‘Recession Porn’ .
Why on earth would you bother publishing, as your Number one article, the rantings of a discredited profession, namely the economists based with the US Federal Reserve, so that you continue to promote ongoing negativity, worry and stress?
I thought you lot were better than that, particularly having regard to your insightful and wise comments on the ridiculous behaviours of the Federal Opposition.
One just needs to remember that it was economists, just 12 months ago in Australia, who led the Reserve Bank to increase interest rates and to totally fail to predict in any way a collapse that was coming just 8 months later.
Why would you believe a prediction of economists that is ‘4-6 years’ in time frame?
I suggest that no one should.
I suggest that most economists are ignoring two fundamental factors:
1. With the amazing capability of the Internet, there are over 600 million budding internet entrepreneurs, increasing daily with the insane downsizing virus that has overcome the brains of the leaders of many profitable and large organisations, who are able to ‘do business’ without the need for banks. Barter will be making a big comeback, and banks will be the ones who, deservedly, suffer.
2. The amazing reslience and capacity of the human mind to adjust to one’s own circumstances and take the steps to survive and thrive, regardless of macro trends, and crazy macro predictions. Just witness the people of Zimbabwe, and what they have been able to do to survive for the past 20 years in the madness of the Mugabe regime.
We humans are brilliant
Cut out the negative nonsense of the economists!
Charles Kovess
I think the wrong section of the article was highlighted. The most pertinent information in the forecast was this…
‘Participants generally judged that their projections for both economic activity and inflation were subject to a degree of uncertainty exceeding historical norms.’
In this light any prediction is not worth the committee set up to guess at it.