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Fed Expects Sluggish Economy to Continue

Federal Reserve policymakers see an improving short-term economic outlook but believe the economy and job market will remain sluggish for years, according to a forecast released Tuesday.

Other reports showed home prices and consumer confidence rose slightly recently. The developments portray a steady but tepid recovery.

"The economy and housing markets are benefiting enormously from very aggressive policy efforts," says economist Mark Zandi of Moody's Economy.com. Those include last summer's cash-for-clunkers program.

The Fed expects the economy to grow a bit more robustly the rest of this year and in 2010 than it previously anticipated, according to the minutes of its Nov. 3-4 meeting. It said the economy should contract 0.1% to 0.4% in 2009, better than its June forecast of 1% to 1.5%. And it now expects growth of 2.5% to 3.5% next year, up from 2.1% to 3.3%.

Separately, the Commerce Department revised downward its projection of third-quarter economic growth to 2.8% from 3.5%, though that likely still marks the end of the recession.

The Fed projected unemployment of 9.3% to 9.7% next year, down from 9.5% to 9.8% in the June estimate. Noting that inflation should stay under 2% for several years, it expects to keep interest rates near zero for "an extended period."

The central bank based the brighter forecast on stronger-than-expected consumer spending and industrial production. Pointing to a "weaker-than-anticipated" labor market, tight credit and a commercial real estate slump, it added that growth likely will be "rather slow."

It could take "five or six years" or longer for the economy to return to normal, the Fed said. With some industries losing jobs permanently, it revised upward its estimated "longer-run unemployment" to about 5.1% from 4.9%.

Meanwhile, housing prices ticked up 0.3% in September, the fifth monthly increase in a row but the smallest yet, according to the Standard&Poor's/Case-Shiller home price index. The smaller rise suggests home prices will fall up to 10% as more foreclosed homes hit the market in 2010, Zandi says.

The Conference Board said its index of consumer confidence rose to 49.5 in November from 48.7 in October, although that's still low. The index fell two straight months after hitting 54.5 in August.

"Consumers are entering the holiday season in a very frugal mood," said Lynn Franco, who oversees the survey.

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