Fed forecasts US slowdown

Julian Harris
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PROSPECTS of an American recovery are less bright than previously thought, according to minutes of the most recent Federal Reserve (Fed) meeting, released last night.

The Fed expects unemployment for next year of around 8.9--9.1 per cent, up from its last prediction of 8.3--8.7 per cent.

Furthermore, its growth forecasts for 2011 fell to 3--3.6 per cent, down from 3.6–4.5 per cent.

Despite low inflation, the Fed expects Core Personal Expenditure (PCE) of 1–1.1 per cent this year. The last forecast was for 0.8—1 per cent.

All but one dissenting member supported monetary policies of quantitative easing (QE) combined with interest rates kept as low as possible.

Yet the minutes reveal intense discussions over the second phase of quantitative easing (QE2).

Several members thought further easing “could cause an undesirably large increase in inflation”.

QE could provoke “unwanted downward pressure on the dollar”, said some members, and might “have only a limited effect on the pace of the recovery” and further monetary stimulus “would be warranted only if the outlook worsened and the odds of deflation increased materially,” the minutes say.