Fed sees full recovery taking 5 years, and worries about inflation risk

WASHINGTON - It could take five to six years for the economy and the labor market to return to full health, a Federal Reserve report yesterday cautioned.

The central bank also acknowledged that its efforts to keep the recovery from the recession going could feed a new speculative bubble.

Record-low interest rates "could lead to excessive risk-taking in financial markets," according to the documents, which were the minutes of the Fed's closed-door policy meeting this month. Additionally, the low rates - the Fed has kept them near zero for nearly a year - could cause consumers, investors, and businesses to worry about inflation taking off.

Although Fed officials saw the current likelihood of that as "relatively low," they pledged to "remain alert to these risks."

The minutes said Fed officials expect the unfolding recovery will be gradual, as modest economic growth keeps the nation's unemployment rate elevated over the next several years. The jobless rate in October rose to 10.2 percent, the highest since 1983.

Most Fed policymakers said it could take "five or six years" for employment to regain its strength. Before the recession began in December 2007, the rate was 4.9 percent.

Also yesterday, in updated economic projections, the Fed said the economy will shrink 0.5 percent or be flat this year. The old forecast called for a contraction of anywhere from 0.6 to 1.6 percent.

Growth next year, measured by the gross domestic product, should turn out slightly better than the Fed previously projected - ranging from 2 percent to 4 percent - up from 0.8 to 4 percent.

But the central bank predicted the jobless rate could hover between 8.6 and 10.2 percent next year. That is a tad better than its previous forecast of up to 10.6 percent.