US Federal Reserve policymakers largely gave up hope for economic growth in 2009 and discussed setting an inflation target last month as a deepening recession heightened fears of a dangerous decline in prices.
With employment falling, the housing market showing no sign of stabilization, and credit conditions still tight despite official interest rates being cut to close to zero, the central bank projected the economy would shrink by between 0.5 per cent and 1.3 per cent this year, the Fed said in minutes of its January 27th to 28th policy meeting released last night.
In its previous quarterly forecast in October, the Fed offered a range for 2009 US gross domestic product that ranged from a decline of 0.2 per cent to growth of 1.1 per cent.
The central bank's forecasts strip out the highest and lowest views to provide what it calls a "central tendency." The latest forecast shows that two of 16 Fed officials still saw the possibility of at least some growth in 2009.
US stock markets showed little reaction to the revised forecast. Some economists noted that the gloomier economic view was still not as grim as many private forecasts.
The unravelling economy has pushed inflation uncomfortably low in the eyes of Fed officials, but the central bank stopped short of setting an explicit inflation target. An inflation target is seen by some policy-makers as an important took in achieving stable prices.
Instead, for the first time, the Federal Reserve issued long-range projections that offered a signal on how it expects the economy to perform beyond its normal three-year forecast horizon.
The projections in the minutes of the central bank's policy-setting Federal Open Market Committee showed officials thought inflation would remain abnormally low through 2010 and possibly into 2011.
Their longer-run projection called for inflation of 1.7 per cent to 2 per cent, well above the 2009 forecast for 0.3 per cent to 1 per cent and an indication of the inflation rate officials would like to achieve.
"The longer-term projections of inflation may be interpreted ... as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by Congress - that is the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability," Fed Chairman Ben Bernanke told the National Press Club.
Taking on-the-record media questions for the first time since becoming Fed chairman in 2006, Bernanke said the long-run projections should help anchor public expectations about the future path of inflation in a way that could help prevent a self-reinforcing inflationary, or deflationary, psychology.
Deflation, a period of sustained price declines, is seen as dangerous to the economy because it can cause businesses and consumers to delay purchases in the hopes of securing even lower prices, which would worsen the recession.
When Bernanke took the helm at the Fed, he was a vocal proponent of setting a numerical target for inflation. However, some officials have worried that establishing an explicit target would limit the central bank's flexibility.
With policy-makers increasingly concerned that falling prices will trigger a dangerous round of deflation and prolong the recession, some economists had speculated the Fed would extend its forecast horizon in a compromise move.
Reuters