Fed: Unemployment will top 10 percent this year

WASHINGTON -- The Federal Reserve expects the economy this year will sink at a slower pace than it previously thought, but that unemployment will top 10 percent and remain high for the next few years, according to a forecast released yesterday.

The Fed now predicts the economy will shrink 1 percent to 1.5 percent this year, an improvement from its forecast issued in May. At that time, the Fed projected the economy would contract 1.3 percent to 2 percent.

The upgrade -- which helped major stock indicators jump about 3 percent and the Dow Jones industrial average to add 257 points -- comes from the expectation that the economy's slide in the first half of 2009 wasn't as bad as previously thought. The Fed said the economy should start growing again in the second half of this year, although the pace is likely to be plodding.

In fact, most Fed policymakers said it could take "five or six years" for the economy and the labor market to get back on a path of full health in the long term. And, most officials saw "the economy as still quite weak and vulnerable to further adverse shocks."

Against that backdrop, the Fed's forecast for unemployment this year worsened. The central bank predicted the jobless rate could rise as high as 10.1 percent, compared with the previous forecast of 9.6 percent.

The nation's unemployment rate climbed to 9.5 percent in June, a 26-year high.

The predictions are based on what the Fed calls its "central tendency," which exclude the three highest and three lowest forecasts made by Fed officials. The central bank also gives a range of all the forecasts. That range showed that some officials expect the jobless rate could rise as high as 10.5 percent this year and 10.6 percent in 2010.

The post-World War II high was 10.8 percent at the end of 1982, when the country had suffered through a severe recession. The jobless rate averaged 5.8 percent last year.

For 2010, the Fed predicted the economy would grow 2.1 percent to 3.3 percent. That's a slight upgrade from its old forecast of growth of 2 percent to 3 percent.

The Fed's estimate is based on comparing projected activity in the fourth quarter of one year with the same period a year earlier. The economy dipped 0.8 percent in 2008 by that measure.

Still, it would mark a slow recovery, the Fed said, and that will keep unemployment elevated well into 2011. Companies won't be in any mood to ramp up hiring until they are certain that any recovery has staying power. Some Fed officials predicted the jobless rate could hover in the 8 percent range or as high as 9.2 percent in 2011.

To help lift the country out of recession, the Fed has slashed interest rates to a record low near zero. In March, the Fed launched a $1.2 trillion effort to drive down interest rates to revive lending and get Americans to spend more freely. Those actions -- along with President Barack Obama's $787 billion stimulus package of tax cuts and increased government spending -- should help the economy return to growth in the second half of this year.