According to members of the US Federal Reserve, the American economy faces four to six years of sluggish growth … a period of downturn longer than has been forecast by any other economic policy setting group around the world.

The minutes of the latest meeting of the Fed’s key policy group, the Open Markets Committee (which sets interest rates), show that at best the US economy can expect four years of below-trend growth, high unemployment and no real worries about inflation.  

The Fed indicated it expects gross domestic product to decline by 0.5% to 1.3% this year, significantly worse than the October forecast of -0.2% to positive 1.1% growth. Unemployment is forecast to rise from 8.5% to 8.8%. GDP fell by 3.8% in the fourth quarter of 2008, and unemployment hit 7.6% last month, a 17-year high.

According to the minutes, some members of the Open Markets Committee don’t see any relief on unemployment until well into 2011.

In the outlook section of the forecast, the minutes read:

Looking further ahead, participants’ growth projections had a central tendency of 2.5 to 3.3 percent for 2010 and 3.8 to 5.0 percent for 2011. Participants generally expected that strains in financial markets would ebb only slowly and hence that the pace of recovery in 2010 would be damped. Nonetheless, participants generally anticipated that real GDP growth would gain further momentum in 2011.

FOMC participants viewed the outlook for economic activity and inflation as having weakened significantly since last October, when their last projections were made.

Participants projected that real GDP would contract this year, that the unemployment rate would increase substantially, and that consumer price inflation would be significantly lower than in recent years.

Given the strength of the forces currently weighing on the economy, participants generally expected that the recovery would be unusually gradual and prolonged:

All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and and unemployment and by an appropriate rate of inflation (my bolding).

Participants generally judged that their projections for both economic activity and inflation were subject to a degree of uncertainty exceeding historical norms. Nearly all participants viewed the risks to the growth outlook as skewed to the downside.

It’s not Fed policy and there was certainly no sign of a mention of this in a separate public speech by chairman Ben Bernanke today. But it does indicate how gloomy some of the major policy setters in America’s most important financial institution have become.

And it’s an important point because without a strongly rebounding American economy, we won’t get a bounce elsewhere. If America’s rebound is slow and tepid, then we face a much slower recovery here and around the world.

No-one in Australia, from the Government to the Reserve bank, is thinking along these lines, but if the Americans are right to any degree, the recovery here expected towards the end of 2009 and into 2010 will fade away.

Peter Fray

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