web analytics
Your Independent Alternative!

Fed Says Jobless Rate May Top 10%

The Federal Reserve has raised its fourth-quarter unemployment forecast to as much as 10.1% and expects the jobless rate to be higher than anticipated through 2011, according to a report released Wednesday.

But the central bank also says the economy this year will shrink less than it projected and reiterated that it expects the recession to end this year.

Noting unemployment has risen more rapidly than expected in recent months, the Fed said the jobless rate would climb to 9.8% to 10.1% in the fourth quarter, up from the 9.2% to 9.6% it projected in April, according to minutes of the Fed's June 23-24 meeting.

The revision came as little surprise to economists, many of whom have predicted unemployment would hit 10% this year before peaking slightly above that in mid-2010. The jobless rate was 9.5% in June.

"They had to move it up," says IHS Global Insight's Brian Bethune.

The Fed now projects unemployment will fall to 9.5% to 9.8% late next year and to 8.4% to 8.8% in late 2011 - both about half a percentage point higher than its April forecast.

At the same time, the Fed said the economy will grow more strongly in the fourth quarter and in 2010 than it expected. For all of 2009, the central bank expects the economy to contract 1.0% to 1.5%, better than its April forecast of 1.3% to 2.0%. And it should grow 2.1% to 3.3% in 2010, slightly better than earlier projections.

The Fed cited a litany of reasons for its improved outlook, including more stable consumer spending, the bottoming of home sales and higher household wealth.

The more vibrant growth forecast prompted the Fed to modestly increase its inflation forecast to about 1.2% this year and 1.5% in 2010 - still below normal.

"It's good news," says John Ryding, of RDQ Economics. "Three, four months ago, it wasn't clear that there was a bottom in sight, and now, the debate has switched to what kind of recovery we're going to have."

The report helped drive the Dow Jones industrial average up 256.72 points to 8616.21.

Yet most Fed policymakers "saw the economy as still quite weak and vulnerable to further adverse shocks," the minutes said. It could take "five or six years" for unemployment and economic output to return to healthy levels.

At its June meeting, the Fed left interest rates unchanged near zero and opted not to expand a program to purchase $1.75 billion in government securities. Such purchases drive down interest rates and boost economic activity.

The minutes show policymakers rejected such a move out of concerns the public would view it as fostering inflation. Those fears could trigger inflation by causing employees to demand wage increases, Ryding says.

Separately Wednesday, the Labor Department said consumer prices rose 0.7% in June from May, largely because of a 17.3% jump in gasoline prices. It was the largest increase in the consumer price index in 11 months.

Steven Wood, chief economist for Insight Economics, said inflation is not a concern, noting consumer prices have fallen since a year ago.

Comments are closed.