MercoPress. South Atlantic News Agency

Federal Reserve expects US recovery, but jobs market prospect dismal

Richard Fisher: Central bank would use “every tool” to fix the economy

Minutes from the last meeting of US Federal Reserve policy makers show just how downbeat they had become on the state of the US economy. It was this pessimism that led them to agree to spend more than one trillion US dollars to revive its fortunes.

“Most participants viewed the downside risks as predominating in the near term,” the minutes said. But the committee did expect a recovery to start in 2009, despite unemployment rising sharply into next year.

Projections for economic activity in 2009 and 2010 were also revised down.

The minutes from the Federal Open Market Committee (FOMC) on 17-18 March of this year listed a catalogue of concerns but also stressed the members' determination to “employ all available tools to promote economic recovery and to preserve price stability”.

They revealed how the US economy had deteriorated more than policymakers had expected since the turn of the year.

“Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending,” a statement from the FOMC said.

“Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.

”US exports have slumped as a number of major trading partners have also fallen into recession,“ it continued. However, despite the depth of the recession, the committee said that it expected recovery to begin in 2009.

GDP is ”expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses of the financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through and the correction in housing activity comes to an end“, it said.

The prognosis for unemployment was more downbeat, however. The jobless rate, which currently stands at 8.5%, ”would rise more steeply into early next year before flattening out at a high level over the rest of the year“, the notes said.

As a result of the pessimism surrounding the short-term outlook for the US economy, all members of the committee agreed to spend an additional 750 billion of mortgage-backed securities and a further 300 billion to buy long-term government bonds.

In related news a top US central banker has said that the unemployment rate in the country could jump above 10% this year.

Richard Fisher, a member of the Federal Reserve's interest-rate setting committee, said the central bank would use ”every tool“ to fix the economy.

The jobless rate rose to 8.5% in March, while 5.1 million jobs have been lost since the US recession began in December 2007. A US unemployment rate of 10% would be the highest since June 1983.

The total number of unemployed people stood at 13.2 million in March, according to figures from the Department of Labour last week.

”Our economy faces a tough road. We are the central bank of the largest economy in the world, and we are duty bound to apply every tool we can to clean up the mess that our financial system,“ Mr Fisher said in Tokyo.

”I expect the unemployment rate to continue rising to a level that could surpass 10 percent by year-end,” he added.