The Federal Reserve expects unemployment will stay high over the next two years because recession-scarred Americans are likely to stay cautious, making for only a moderate-paced economic recovery.
Fed policymakers said in a forecast released on Wednesday that it will take “some time” for the economy and the jobs market to get back to normal. They did not spell out how long that would be.
Previously they suggested it could take five or six years for economic conditions to return to full health. A “sizable minority,” however, thinks it could take more than five or six years for the economy and the job market to return to previous levels.
In more recent economic projections, the Fed said the unemployment rate this year could hover between 9.5 percent and 9.7 percent. Next year, it will drop to between 8.2 percent and 8.5 percent. By 2012, the jobless rate will range between 6.6 percent and 7.5 percent.
Although those forecasts are little changed from projections the Fed had released in late November, the figures show that unemployment will remain elevated heading into this year’s congressional elections as well as the presidential election in 2012. A more normal unemployment rate would be between 5.5 percent and 6 percent.
Fed policymakers “expect that the pace of the economic recovery will be restrained by household and business uncertainty, only gradual improvement in labor market conditions and a slow easing of credit conditions in the banking sector,” the forecast said.
Against that backdrop, the Fed expects the US economy will grow between 2.8 percent and 3.5 percent this year. Growth will pick up to between 3.4 percent and 4.5 percent next year and log similar growth in 2012. The economy would need to grow by at least 5 percent a year to make a dent in the unemployment rate, analysts say.
Further insights into the Fed’s view of the economy and its strategy for reeling in stimulus money will likely come at a House of Representatives’ Financial Services Committee hearing next Wednesday. That’s when Fed Chairman Ben Bernanke will deliver the Fed’s twice-a-year economic report to Congress.
Last week, Bernanke said the central bank would likely start to tighten credit by boosting the rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans.
Fed officials said that bumping up the interest on bank reserves would be a key element of their exit strategy, last Wednesday’s documents show. Officials offered a range of strategies on how this and other tools could be used.
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