Fed warns of slow road to recovery for US

The Federal Reserve has warned that it could take six years for the US to recover fully from recession and that unemployment in the world's largest economy will not come down as fast as previously hoped.

The minutes of the most recent meeting of the Fed's interest rate-setting committee, the FOMC, released last night, showed members have a gloomier outlook for the future after disappointing jobs numbers and the European sovereign debt crisis, but that they still do not expect a double-dip recession.

The Fed cut its forecast for US GDP growth this year from 3.45 to 3.25 per cent and said the FOMC was split over the balance of risks to the economy, with as many members worried about downside risks as believe the economy could outperform.

The US markets reacted most strongly to language in the minutes about how long it would take for the US economy to "converge fully to its longer run path". Most FOMC members expect that process to take up to "five to six years", according to the minutes.

Earlier yesterday the release of new economic data had further soured the picture. US retail sales fell more sharply than expected in June, down 0.5 per cent in large part because of a decline in car sales. It was the second month in a row that consumers had pared back. And businesses are holding less inventory than expected, suggesting weakening expectations of future sales.