Burned before, Fed officials cautious on rebound

Thu Feb 23, 2012 7:42am EST
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By Pedro Nicolaci da Costa

WASHINGTON (Reuters) - U.S. central bank officials have good reason to be skeptical about the strength of the economy: excessive optimism has caught them flat-footed before.

Despite stronger employment data and hints of firmer inflation, Federal Reserve policymakers are not ruling out another round of monetary easing in the months ahead.

That's because many of them see plenty of risks that could derail the tepid pace of recovery that officials are projecting for this year and next.

A worsening of Europe's banking crisis and geopolitical tensions in the Middle East are two of the most obvious risks. But there are also domestic problems, including weak consumer demand and a job market that remains a shadow of its prerecession self.

A rapid decline in the jobless rate in recent months, to a three-year low of 8.3 percent in January from 9.1 percent in August, has surprised economists within and outside the Fed given the broader economy's relatively soft performance.

U.S. gross domestic product grew just 1.7 percent in 2011.

"We are seeing the unemployment rate doing something very different than we are seeing in the other indicators," John Williams, the San Francisco Fed president, told reporters earlier this month.

The Fed's forecasting record hasn't been all that stellar, so it's little wonder officials are reluctant to declare victory on mere inklings of strength.   Continued...

The U.S. Federal Reserve building is seen in Washington June 29, 2011. REUTERS/Jim Bourg