The Federal Reserve (Fed) updated their economic forecast for 2011, projecting 3% to 3.6% growth. This prediction is notably lower than their original June forecast of 3.5% to 4.2%.

In their meeting at the beginning of November, the Fed decided to buy $600 billion in Treasury bonds over the next eight months in an attempt to lower interest rates and encourage more consumer spending.

first tuesday take: The slow rate of economic growth this past year has pushed the Fed to step in as the lender of last resort and use whatever monetary weapons they have left to fend off deflation. The need for further stimulus is unsurprising.

Congress (the Senate) has finally reacted to the utter failure of the jobs market to respond with increased private employment by including around $200 billion in tax relief to middle income earners – which they will spend on consumer goods. Gifting three times that amount to the wealthy among us, however, will not increase spending. That money will be hidden away in bank accounts.

The historic recession trends first tuesday has considered for the past two years still lead us to point towards a return to home sales price peaks in 2016-2018, which is still far off in the distance. [For more information regarding California home sales, see the November 2010 first tuesday article, Home sales volume and price peaks.]

Historically, periods of reduced employment have lasted between four and five years — this time it will be longer, around eight years after the 2007 peak. We predict slow but gradual job growth through 2012, picking up to 400,000+ annually through 2016 when we will have recovered all the 1,500,000 jobs lost after 2007. [For more information regarding unemployment, see the November 2010 first tuesday Market Chart, Reeling from California unemployment.]

The Fed is merely carrying out the decision they made months ago in hopes of forcing lenders to make loans and encouraging consumer confidence. Up next will be consumer purchasing and employer hiring, and so on as the cycle back to resurgence carries on – which has finally begun in California. As a result of their decision, real estate prices will tend to remain level with an upward appearance at times, and interest rates should slip back to their lows of mid 2010. [For more information regarding the Fed’s plan to purchase treasuries, see the October 2010 first tuesday article, The Fed purchases Treasuries, fends off deflation.]

Re: “Fed issues gloomy economic forecast for 2011” from the San Francisco Chronicle