Thursday, May 21, 2009

U.S. Fed takes gloomier outlook on economic recovery

The U.S. central bank cut its outlook for America's economic recovery, according to a shorthand transcript of the central bank's latest meetings released Wednesday.

The Federal Open Market Committee, the group within the Federal Reserve that makes interest rate decisions, now believes that the U.S. economy will contract by between 1.3 per cent and two per cent in 2009.

The new bank thinking was contained in minutes of the FOMC meetings of April 28-29 which were released publicly this week.

The Fed's revised outlook was more than half-a-percentage point poorer than January's forecast, when the American central bank predicted the national gross domestic product would shrink by at least 0.5 per cent and by at most 1.3 per cent.

Stocks rising

The darkening mood of the Fed's governors was in sharp contrast to analysts who had been calling the end of the recession in recent moths.

Indeed, by April 28, the first day of the FOMC get-together, the TSX had already gained 25 per cent compared to the index's 52-week low.

Since the central bank's discussions, the TSX rose another five per cent.

The Federal Reserve also blackened its view of the 2009 jobless rate by a similar amount. The bank now believes U.S. unemployment, once set between four and five per cent, will hit between 9.2 and 9.6 per cent.

In January, the central bank forecast the jobless level at between 8.5 and 8.8 per cent. The Federal Reserve now believes it will take until 2011 before the American unemployment rate has a chance of slipping below the eight per cent mark.

Currency traders noted that the U.S. dollar began losing steam as soon as the new outlook became known.

"The minutes show that the FOMC expects a deeper recession in 2009, a slower rebound in 2010, a greater rise in unemployment," said Terri Belkas, accuracy strategist writing on the website Daily FX.

The Dow Jones Industrial Average was holding on to its gains in the afternoon session, up approximately 25 points.