Fed Warns Economy May Take Five or Six Years to Recover

Frank McGuire

Moneynews

Federal Reserve officials now fear that the U.S. economy will take at least five or six years to fully recover from the biggest economic downturn since the Great Depression.

Fed officials at their June meeting cut their forecasts for economic growth this year while taking a slightly dimmer view of the economy than they did in April.

Fed officials concluded that the “economic outlook had softened somewhat.” One-half of Fed officials said they saw “risks to growth as having moved to the downside.”

Minutes of their June meeting, released Wednesday, said Fed officials expect that it will “take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation.”

The report said that most Fed officials “expected the convergence process to take no more than five to six years.”

Fed officials also trimmed their forecasts for growth this year to a range of between 3 percent and 3.5 percent from the 3.2 percent to 3.7 percent they projected in May.

The report revealed a more cautious mood among the Fed policymakers in light of Europe’s debt crisis, a volatile Wall Street, a stalled housing market and high unemployment, the Associated Press reported.

With risks now growing, Fed officials at their June 22-23 meeting saw the need to explore new options for bolstering the economy. That is a turnaround from earlier this year when they were moving to wind down crisis-era supports. But no new specific steps were disclosed or agreed upon.

Fed Chairman Ben Bernanke and his colleagues agreed to hold a key interest rate at a record low near zero to help revive the economy. They repeated a pledge to keep rates there for an “extended period.”

Fed policymakers said they didn’t think the slowing in the economy seen so far warranted new stimulative actions besides those now in place, according to the minutes of the June meeting.

However, Fed officials said the central bank “would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably,” the minutes stated.

The minutes showed Fed officials also revised down modestly their outlook for inflation, Reuters reported.

Some participants in the meeting saw risks that inflation might slide lower, and a few were worried about a dangerous deflationary spiral.