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Yahoo! My Yahoo! Mail Yahoo! Search Search: Sign InNew User? Sign Up News Home - Help Navigation Primary Navigation Home Singapore Asia Pacific World Business Entertainment Sports Technology Top Stories Most Popular Secondary Navigation Search Search: Fed sees US contraction, moves toward inflation goal AFP - Thursday, February 19 WASHINGTON (AFP) - - The Federal Reserve has forecasted the US economy would shrink in 2009 and for the first time moved toward a long-range inflation goal in a bid to clarify monetary policy. ADVERTISEMENT The Fed said it expects the world's largest economy to contract 0.5 to 1.3 percent this year and anticipated an "unusually" prolonged recovery, according to the minutes of a Federal Open Market Committee (FOMC) meeting in January. The prior estimate, in late October, predicted a range between a 0.2 percent contraction in gross domestic product (GDP) and a 1.1 percent expansion. In 2008, the economy grew 1.3 percent despite being in recession the full year, according to government data. Unemployment in 2009 was forecast to rise from 8.5 to 8.8 percent and gradually fall as low as 6.7 in 2011. Core inflation, excluding energy and food prices, would rise a weak 0.9 to 1.1 percent this year and only climb as high as 1.5 percent in the following two years. The specter of deflation, the destructive spiral of falling prices that has officially gripped Ireland and is worrying the US, China and other economies amid the global downturn, was clearly seen by some Fed policymakers. "Many participants noted some risk of a protracted period of excessively low inflation, especially if inflation expectations were to move down in response to lower actual inflation and increasing economic slack, and a few even saw some risk of deflation," the minutes said. "The information reviewed at the meeting indicated a continued sharp contraction in real economic activity," said the minutes of the FOMC's January 27-28 meeting, at which policymakers maintained the federal funds rate target at a historically low zero to 0.25 percent. "Given the strength of the forces currently weighing on the economy, participants generally expected that the recovery would be unusually gradual and prolonged," the minutes noted. The Fed minutes noted a degree of uncertainty on projected growth and inflation data "exceeding historical norms" as the country entered its second year of recession. The Fed comments came ahead of the government's January consumer price index (CPI) report on Friday. Consumer prices fell 0.7 percent in December after November's record 1.7 percent fall. Prices for 2008 rose a mere 0.1 percent from 2007, the lowest figure in half a century. The central bank said it saw the economy recovering in 2010 better than previously expected, at growth between 2.5 percent and 3.3 percent, up from a 2.3-3.2 percent forecast in October. Growth in 2011 would accelerate as much as 5.0 percent, significantly higher than the prior maximum of 3.6 percent. "While the Fed's projections are now more realistic, we believe that they are far too rosy," said Brian Bethune, chief US financial economist at IHS Global Insight. His firm projects GDP will decline by roughly 2.0 percent in 2009. In a policy milestone, the Fed announced for the first time longer-range economic projections on GDP, unemployment and inflation. The longer-run projections represent the factors needed under "appropriate monetary policy and absent further shocks to the economy." It defined appropriate monetary policy as "the future policy deemed most likely to foster outcomes satisfying the Federal Reserve's dual mandate of maximum employment and price stability." The FOMC's longer-run forecasts were for GDP growth of 2.5 to 2.7 percent, unemployment at 4.8 to 5.0 percent, and inflation measured by consumer prices on the Personal Consumption Expenditures (PCE) index at 1.7 to 2.0 percent. "Most participants judged that a longer-run PCE inflation rate of 2.0 percent would be consistent with the dual mandate," the Fed said. The move brings the Fed closer in line with other central banks such as the European Central Bank, which has a price stability goal of under or about 2.0 percent inflation in the medium term. The Fed said that policymakers in a January 16 conference call "made no decisions" on setting an explicit numerical objective for inflation. Fed chairman Ben Bernanke said in a speech in Washington that there was "little risk" of inflation despite the Fed's massive efforts to ease credit and stabilize the ailing financial sector. "At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time." Email Story IM Story Printable View Blog This Recommend this article Average (1 vote) Sign in to recommend this article » Most Recommended Stories » Enlarge Photo US Chairman of the Federal Reserve Ben Bernanke. The US central bank has forecasted the national economy would shrink in 2009 and for the first time moved toward a long-range inflation goal in a bid to clarify monetary policy. 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