Federal Reserve: Economy to Grow Slower Than Expected

November 26, 2010 05:44

Top  Federal Reserve officials expect the unemployment rate to remain around nine percent at the end of next year and still be over eight percent at the end of 2012.

The Americano

President Barack Obama and Democrats in Congress better hope that Federal Reserve officials are wrong in their predictions for the U.S. economy in the next two years, if they hope to do better in the 2012 elections than they did in the mid-terms earlier this month.

The news released by 18 top leaders of the central bank Tuesday was not encouraging to Democrats. Top  Federal Reserve officials expect the unemployment rate to remain around nine percent at the end of next year and still be over eight percent at the end of 2012.

The internal forecasts released, explained, according to officials why the central bank had decided to embark on new efforts to boost the economy three weeks ago.

In the minutes of the meeting held earlier in the month and released Tuesday, the central bank officials said they expected to economy to grow at 3 to 3.6 percent pace next year, down from its previous forecast that said the economy would grow at 3.5 to 4.2 percent in 2011. This means that the unemployment would still be around 9 percent by the end of next year – 8.9 to 9.1 percent.

Also on Tuesday,  The National Association of Realtors, announced that sales of previously owned homes slipped 2.2 percent last month to a seasonally adjusted annual rate of 4.43 million units. The performance was weaker than had been expected. Economists at JPMorgan Chase had forecast that sales would rise in October to an annual rate of 4.60 million units.

Sales had plunged to the slowest pace in 15 years in July and then posted gains in August and September before slipping back in October. Sales in October were 38.9 percent below their peak of 7.25 million units set in September 2005 during the height of the housing boom.

The information released showed that the median price for a home sold in October was $170,500, down 0.9 percent from a year ago, as prices continue to be depressed by weak sales conditions and a huge overhang of unsold homes.

Taken together, the economic figures released Tuesday, show that they economy still has a long way to go before anyone can say it has recovered from the recession, or even that it has improved significantly.

The minutes of the Federal Reserve meeting were meant to show economists all around the world why American central bankers had decided to buy $600 billion of Treasury bonds in a bid to lower long-term interest rates and encourage growth. Their decision was criticized strongly by foreign finance ministers, Republican members of Congress and conservative economists.

“Though the economic recovery was continuing, members considered progress toward meeting the Committee’s dual mandate of maximum employment and price stability as having been disappointingly slow,” the minutes said. “Moreover, members generally thought that progress was likely to remain slow.”

However, the document also leaves little doubt that several Fed officials remain uneasy with the action. Some anticipated that the decision would have only a “limited” effect on the pace of recovery, arguing that action should be taken only if the odds of deflation “increased materially.”

And some “noted concern” that the action “could put unwanted downward pressure on the dollar’s value in foreign exchange markets” or “an undesirably large increase in inflation.”

Despite all efforts by the administration and the Federal Reserve, the housing market has never fully recovered from the downturn. Some can’t sell their current home to upgrade to a larger home, either because they have lost equity or they can’t find prospective buyers.

Some analysts said that the moratorium that many big lenders imposed on foreclosures may have dampened sales in October by introducing more uncertainty in the sales market. The National Association of Realtors, however, said a bigger problem is the tight lending standards that banks have put in place in the wake of record foreclosures.

“The dial has been tightened way too much” on lending standards, said Lawrence Yun, chief economist of the Realtors.

Yun forecast that sales of existing homes for the entire year will total 4.8 million units, which would be 7 percent below the 5.16 million homes sold last year, showing that the housing market continues to struggle with tight credit and unemployment that remains painfully high in the wake of the worst recession since the 1930s.

The forecast of 4.8 million sales would be the poorest performance since 1997 when 4.37 million homes were sold. Yun said he was looking for a modest rebound in 2011 as the labor market slowly improves. He forecast sales of previously owned homes would rise to 5.1 million units next year.

The Americano / Agencies

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