Source: The Associated Press

Officials at the U.S. central bank have become more pessimistic in their economic outlook through next year and have lowered their forecast for growth.

Officials at the U.S. Federal Reserve say in an updated forecast that the American economy will grow only 2.4% to 2.5% this year.

That’s down sharply from a previous projection of 3% to 3.5%.

The Fed also estimates that next year the economy will expand by 3% to 3.6%, down from the previous forecast of 3.5% to 4.2%.

The darker view helps explain why the Fed decided at its Nov. 2-3 meeting to launch another round of stimulus.

The central bank plans to buy $600 billion in U.S. Treasury bonds over the next eight months in an effort to lower interest rates and spur more spending.

The minutes from the latest Federal Reserve meeting highlight the concern U.S. central bankers have over the recovery, Bay Street economists says.

“Overall, the minutes highlight that the Fed sees output and employment continuing to increase, ‘but only slowly’, and that progress toward the Fed’s dual mandates has been ‘disappointingly slow’,” notes RBC Economics. “While committee members considered it ‘quite unlikely that the economy would slide back into recession’, participants saw weaker growth this year and ‘expected a somewhat more gradual economic recovery over the next several years’.”

TD Economics notes that the minutes reveal “increased concern for conditions in the housing market, which appears to have deteriorated in the aftermath of the foreclosure crisis”. And, it says there was also “a considerable diversity of opinion” over the magnitude of structural unemployment as well as the economic and inflation outlook. “Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside. Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside.”

“These minutes will likely do little to set market expectations at ease,” TD concludes. “In fact, they reveal considerable disagreement about the effectiveness of asset purchases on the economic outlook.”

Moreover, TD says that the Fed’s forecasts for both the unemployment rate and economic growth appear to be on the optimistic side. “From an optics point of view, this is understandable: the Fed cannot undertake quantitative easing without assuming some positive lift to output. However, we are of the opinion that with credit remaining constrained by considerable uncertainty in the housing market and financial sectors, that economic growth is likely to trend below 3.0% over the next two years, and the unemployment rate to remain above 9.0%,” TD concludes.

RBC says that the deterioration in the Fed’s economic outlook “suggests that the pace of growth will be only modest in the near term, and the minutes support our view that the Fed will likely maintain its current, highly stimulative, monetary policy stance throughout 2011.”

with files from James Langton