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Fed: Economy Will Shrink, Unemployment Will Rise

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The Associated Press

Published: February 19, 2009

WASHINGTON - The Federal Reserve on Wednesday downgraded its projections for the country's economic performance this year, predicting the economy will shrink and unemployment will rise.

Under the new projections, the unemployment rate will rise to 8.5 to 8.8 percent this year. The old forecasts, issued in mid-November, predicted the jobless rate would rise to 7.1 to 7.6 percent.

Many private economists say the jobless rate - currently at 7.6 percent, the highest in more than 16 years - will hit at least 9 percent by early next year even with the $787 billion stimulus package signed into law Tuesday.

The Fed also says the economy will contract this year by 0.5 to 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent.

The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country suffered through a severe recession.

The bleaker outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. Those negative forces have plunged the nation into a recession, now in its second year.

"Given the strength of the forces currently weighing on the economy," Fed officials "generally expected that the recovery would be unusually gradual and prolonged," according to documents on the Fed's updated economic outlook.

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