Fed projects high unemployment for next 3 years

more doom and gloom.......

By MARTIN CRUTSINGER, AP

WASHINGTON — The Federal Reserve projects the unemployment rate will stay elevated until late 2015, suggesting it will keep short-term interest rates low for the next three years.

The latest economic forecasts released Wednesday after the Fed's final meeting of the year were little changed from September. But they coincided with a new communication strategy announced by the Fed that links future interest rate hikes with unemployment below 6.5 percent.

The unemployment rate was 7.7 percent in November.

The central bank said that it expects economic growth to improve next year but that it will be no stronger than 3 percent. Growth could increase to 3.5 percent in 2014 and 3.7 percent in 2015.

Unemployment will fall no lower than 7.4 percent next year and 6.8 percent by the end of 2014, the Fed projects. The earliest the Fed sees unemployment dropping below 6.5 percent is the end of 2015.

The Fed said it plans to keep its key short-term interest rate near zero as long as unemployment remains above 6.5 percent and inflation is expected to stay below 2.5 percent.

The latest forecast projects inflation will stay at or below 2 percent for the next three years. That gives the Fed more leeway to pursue aggressive stimulus measures.

In an effort to drive the unemployment rate lower, the Fed said after its meeting that it will spend a total of $85 billion a month to sustain an aggressive drive to keep long-term interest rates low. The goal is to encourage more borrowing and spending, which drives economic growth.

The Fed said it will continue buying bonds until the job market shows substantial improvement.

The projections made no mention of the "fiscal cliff," the combination of tax increases and spending cuts that are set to kick next month and threaten to push the economy back into a recession. But the modest growth and gradually lower unemployment next year suggest the Fed is assuming President Barack Obama and Republican lawmakers will reach a budget deal before then to avoid the cliff.

Bernanke has warned that the Fed does not have the tools to offset the damage to the economy if it goes over the cliff.

At the same time, Bernanke has said that if an agreement can be reached that addresses the nation's long-term budget challenges without slowing the recovery in the short term, next year could be "a very good one for the American economy."

Fear of higher taxes has yet to slow hiring. Employers added 146,000 jobs last month, the government said last week. That's about the same as the average monthly gain of 150,000 in the past year.

The unemployment rate fell to a four-year low of 7.7 percent last month from 7.9 percent in October. But the decline was mostly because more people without jobs gave up looking for work. The government only counts people as unemployed if they are actively searching.

The economy grew at solid 2.7 percent annual rate in the July-September quarter, more than double the 1.3 percent rate in the April-June quarter. But many analysts believe worries about the fiscal cliff are contributing to slower growth in the current October-December quarter below 2 percent.

Federal Reserve to keep rates near zero as part of US stimulus programme
Bernanke calls unemployment an 'enormous waste of potential' as Fed plans fresh asset buying to try to kickstart US economy

Dominic Rushe in New York

Ben Bernanke, the US Federal Reserve chairman, called unemployment an "enormous waste of human and economic potential" as he set new targets for the central bank's massive economic stimulus programme Wednesday.

After a two-day meeting, the Fed said it will keep interest rates at close to zero until the unemployment rate drops below 6.5%. The central bank also rejigged its multi-billion dollar monthly asset-buying programme in a fresh attempt to kickstart the lacklustre US economy as Bernanke warned that the argument over the fiscal cliff threatened to derail the recovery.

In its final meeting of the year, the Federal Reserve Open Market Committee (FOMC) said economic activity and employment had "continued to expand at a moderate pace in recent months, apart from weather-related disruptions".

Although the unemployment rate has declined, the FOMC said it remained "elevated" and set itself a target for reducing the numbers out of work. The US unemployment rate dropped to a four-year low last month of 7.7%, but the latest fall was driven in part by people quitting the labour force.

Bernanke said the decision to set targets made the Fed's policy more "transparent".

The shift is a major move for the Fed, which had previously said it intended to keep interest rates near zero at least until mid-2015. Chicago fed president Charlie Evans has been pressing for the Fed to commit to easing monetary policy until unemployment was 7% or core inflation was above 3%. The policy has become known as the "Evans Rule".

The move underlines the Fed's concern with US unemployment, which remains high even though the country has officially been out of recession since June 2009. Bernanke warned once again that failure to reach an agreement over the fiscal cliff would have dire consequences for the US economy.

Unless a compromise on the year end expiration of tax cuts and imposition of spending cuts can be reached "the economy will, I think, go off a cliff," he said. "I don't think the Federal Reserve has the tools to offset that event," he said. Bernanke said it was "exceptionally important and urgent" that a solution is reached.

"I'm hoping that Congress will do the right thing on the fiscal cliff," he said. "There's a problem with kicking the can down the road."

As the Fed seeks to drive down unemployment and stimulate the economy, the FOMC said it would begin buying $45bn of long-term Treasury bonds each month. The stimulus programme will replace another asset-buying scheme known as Operation Twist.

The latest asset-buying programme follows on from the Fed's decision to launch a third round of "quantitative easing" – QE3 – in September, aimed at stimulating the economy by buying mortgage-backed assets. QE3 is also an open-ended programme, unlike its predecessors. The US is now buying a total of $85bn a month in assets between its stimulus programmes.

"In determining how long to maintain a highly accommodative stance of monetary policy, the committee will also consider other information, including additional measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments," the FOMC said.

Eleven out of 12 Fed officials on Wednesday voted to continue QE3, which buys $40bn of mortgage-backed securities each month.

"Taken together, these actions should maintain downward pressure on long-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," the FOMC said.

"In short, the Fed is aggressively trying to add to the economy's strength, but its accommodation has become more clearly conditional. The impact of asset buying is debatable, but over time the effects are significant, in our view. The main risk is that inflation expectations start rising significantly; that has not happened so far," Jim O'Sullivan, chief US economist at HFE said in a note to clients.

"Come stronger unemployment results, elevated inflation readings, or Mayan apocalypse, it seems like Bernanke and his friends on the FOMC are just gonna keep on buyin'," Janney Fixed Income Strategy said in a note to clients.