Fed Lowers Economic Forecast, May Cut Rates
The Federal Reserve is lowering its forecasts for economic activity.
WASHINGTON (AP) – The Federal Reserve on Wednesday sharply lowered its projections for economic activity this year and next, and signaled that additional interest rate reductions may be needed to help combat the worst financial crisis to jolt the country in more than a half-century.
With the economy forecast to lose traction, or even jolt into reverse, unemployment will move higher, the Fed predicted.
Facing the likelihood of “significant weakness” in the economy, some Fed officials suggested “additional policy easing could well be appropriate at future meetings,” according to documents from the Fed’s most recent closed-door deliberations on interest rate policy at the end of October.
To help ease financial turmoil and spur banks to lend money more freely again to customers, the Fed has taken a series of other unprecedented steps, including offering short-term cash loans and buying up mounds of short-term debt that companies rely on to pay day-to-day expenses like payrolls and supplies.
Under its new economic forecast, the Fed now believes gross domestic product could be flat or grow by just 0.3 percent this year. GDP could actually shrink or expand by 1.1 percent next year. Both sets of projections are lower than the Fed’s forecasts delivered to Congress in July.
The prospects for weaker economic activity will push up unemployment. The Fed projected that the national unemployment rate will rise to between 6.3 percent and 6.5 percent this year. The rate in October was 6.5 percent, and last year the rate averaged 4.6 percent.
Given news like this I have to say that it will be interesting to see if Obama is going to stick to his statements about holding off in implementing his tax plan.
While the National Bureau of Economic Research has not announced whether or not the economy is in a recession I think it is a safe bet to conclude that we are in a recession. GDP decreased last quarter. The non-farm payroll has declined for 10 straight months in a row. Unemployment insurance claims are up.
Unemployment has been rising steadily since the start of the year. In January unemployment was 4.9% and now it is 6.5%. Citigroup is laying of 50,000 employees. The auto-industry is begging for money or they too will be laying of thousands of employees. Real personal consumption expenditures have been zero or negative from August through September. This is significant in that personal consumption expenditures (PCE) make up just under 71% of GDP. If PCE goes negative it does not bode well for GDP. If PCE is negative again for October and November it will likely mean that GDP is going to be very low and/or negative. So far the only bright spots I’ve heard of are that the CPI is sharply down and real earnings were up from September to October.