Joblessness could hit 8.8 percent

The Federal Reserve predicted in a document released Wednesday that unemployment could jump from the current 7.6 to 8.8 percent this year as the economy shrinks by up to 1.3 percent. Further, senior officials at the nation’s central bank forecast that an economic “recovery would be unusually gradual and prolonged.”

The predictions lowered previous expectations for the economy and were contained in minutes of a Federal Open Market Committee meeting held Jan. 27-28, before President Obama signed a $787 billion economic recovery package into law.

The Fed forecast in mid-November that the unemployment rate would increase between 7.1 and 7.6 percent and that the economy would contract merely 0.2 percent and might even expand by 1.1 percent this year. The economy previously contracted for a full year in recession-worn 1991, when George H.W. Bush was president.

If the Fed’s predictions are correct, a 1.3 percent shrinkage of economic activity would mark the weakest showing since a 1.9 percent contraction in 1982, when the country was in recession during President Ronald Reagan’s first term.

The minutes basically referred to conclusions about the credit squeeze, joblessness and the poor housing market that most Americans generally have made since the onset of the recession in December 2007, certainly since the stock market meltdown in September that wiped out trillions of dollars because of a crisis brought on by the housing bust.

“In explaining these downward revisions,” the Fed minutes said, “participants [at the meeting] referred to the further intensification of the financial crisis and its effect on credit and wealth, the waning of consumer and business confidence, the marked deceleration in global economic activity”

Fed officials anticipated that unemployment would continue to be substantially higher than normal at the end of 2011, even if there were no further shocks to the economy. They foresaw joblessness dropping to between 8 and 8.3 percent next year and to between 7.5 and 6.7 percent in 2011.

Economists consider the normal unemployment rate to be 5 percent.

Fed officials “noted that consumer spending would likely be damped by the deterioration in the labor markets, the tightness of credit conditions, the continuing decline in house prices, and the recent sharp reduction in stock market wealth, and they saw reductions in consumer demand contributing to further weakness in business investment,” the minutes said.

They foresaw a “gradual” recovery during the second half of this year spurred in part by Fed “measures providing support to credit markets,” they said.

Further ahead, the Fed predicted economic growth of between 2.5 and 3.3 percent in 2010 and between 3.8 and 5 percent in 2011.

Strains in the financial markets “would ebb only slowly” and, therefore, “the pace of recovery in 2010 would be damped,” the Fed minutes said.