Federal Reserve says economic recovery is gaining momentum

The Federal Reserve has upgraded its growth forecast for 2011 on the strength of better-than-expected data about the economy.

Officials at the central bank are expressing optimism that the fledgling economic recovery will strengthen in coming months, even as the nation’s unemployment rate is expected to remain stubbornly high.

Overall, Fed officials upgraded their forecast of gross domestic product growth for 2011 to between 3.4 percent and 3.9 percent, compared to November’s prediction of 3.0 to 3.6 percent. 

On the employment front, the Fed expects joblessness to slowly decline in 2011, while total inflation would remain “subdued.”

Fed officials cited positive economic data, as well as anecdotal evidence from business, as basis for their improved economic outlook, according to minutes of the Federal Open Market Committee’s Jan. 25-26 meeting released Wednesday.

Specifically, the expectations on unemployment ticked down only slightly. The Fed now expects the unemployment rate to sit between 8.8 percent and 9.0 percent in 2011, compared to November’s estimate of 8.9 percent to 9.1 percent. Not until 2013 does the Fed expect the unemployment rate to fall below 7 percent.

While employment data was improving somewhat, Fed officials continued to be disappointed at the speed and volatility of reductions in the unemployment rate.

The minutes also indicate the Fed sees no need to change its plan to buy back $600 billion in Treasury securities as part of a second “quantitative easing” program. That policy, dubbed “QE2,” has come under fire for congressional Republicans, who argue the policy will not boost private lending as the Fed intends, but rather drives up the risk of runaway inflation in the future.

But Fed officials said they were seeing indications that unemployment would remain high, while the risks of inflation remained low. A few unidentified members of the committee said they were unsure of the overall effects of QE2, but did not want to change paths now that it was underway.

Looking at the economy, Fed officials were heartened by increases in household spending, although some noted that it was not clear whether the boosts were sustainable or simply the result of pent-up demand from several slow spending months in the past.

As had been the case over the last several meetings, Fed officials found the housing market to remain weak, as soft demand, a large inventory of foreclosed properties and tight credit combined to make for a bleak housing market.

The minutes come one day before Federal Reserve Chairman Ben Bernanke is scheduled to testify before the Senate Banking Committee on the implementation of the Dodd-Frank financial reform law.