WASHINGTON, D.C. -- The Federal Reserve is optimistic that a robust recovery is on the way, but the minutes of its June meeting reveal that some of its policymakers think the economy is entering an era of prolonged higher unemployment.  The Federal Open Market Committee projects that, after tanking in 2008 and 2009, the economy will grow 2.1%-3.3% in 2010, accelerating to 3.8%-4.6% in 2011. Since long-run healthy growth is only around 2.5%, that's two pretty healthy years.  The Fed, in fact, expects a rosy run through at least 2012. In that period: "Financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading and inflation expectations would be relatively well anchored."  On top of that, the economy would grow "at a rate well above that of its potential," according to the minutes of the FOMC meeting, "the unemployment rate would decline significantly" and overall core inflation "would stay low." This optimism underpins why, at its most recent meeting, the Fed announced no new policy changes to combat recession.  A growing number of private forecasters believe that the recovery has already begun. On Tuesday, Michael Hartnett, chief global equity strategist at Merrill Lynch, boldly declared that the recession is over. Private economists are hardly united here; David Rosenberg, Merrill's star economist until May, now with Gluskin Sheff, wrote on Wednesday, "What is fascinating is to hear forecasts of the recession ending when so far, three of the four major ingredients--real sales, industrial production and employment--have yet to hit bottom."  The Fed revised upward its projections for 2009 and 2010. Their projections are looking less like a U-shaped cycle, where the economy gradually rebounds, and more like a V-shaped path, where the economy turns around sharply.  Don't mistake this for something crazily optimistic. It's not hyperinflation, or deflation, or years of decline, but the economy has been knocked off course so badly that the Fed expects five or six years before things are back to normal. And for unemployment, normal may need to be redefined.  What's normal? The Fed says annual economic growth of between 2.4%-2.8% and inflation of 1.5%-2.1%. But some Fed policymakers are projecting that unemployment will have a new normal--and it will be high.  In April, the Federal Reserve policymakers forecast that long-run unemployment will return to a happy 4.5% to 5.3%. But at its most recent meeting, some unidentified pessimists raised their projection--in the long run, unemployment could stick at 6%, according to at least one member of the Federal Open Market Committee.  That's bad. In the current recession, unemployment didn't hit 6% until August of last year. By then it was pretty clear that the economy was in bad shape--far from the conditions anyone would hope for in a new normal.  From 1994 until 2008, the unemployment rate never once rose above 6.3%. In other words, if these pessimists are correct, the new normal would be about the same as the worst jobless levels in the economy over the last 15 years.  They're just projections, of course, and the Fed's crystal ball is far from perfect. Not all the Fed policymakers agree that there's a new normal on the horizon. The optimists still believe unemployment will return to the old normal of 4.5%.
Central bank predicts the economy will bounce back in 2010 and 2011, but some policymakers expect jobless rate to remain elevated.