Fed lowers economic forecast - East Valley Tribune: Business

Fed lowers economic forecast

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Posted: Wednesday, February 20, 2008 12:45 pm | Updated: 10:08 pm, Fri Oct 7, 2011.

WASHINGTON - The Federal Reserve on Wednesday lowered its projection for economic growth this year, citing damage from the double blows of a housing slump and credit crunch. It said it also expects higher unemployment and inflation.

The updated forecasts come amid worry by Federal Reserve Chairman Ben Bernanke and his colleagues that the economy could continue to weaken, even after their aggressive interest rate cuts in January, according to minutes of those private deliberations released Wednesday.

"With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risks to growth would remain even after this action," minutes of the Fed's Jan. 29-30 closed door meeting showed.

The Fed at that session voted to cut a key interest rate by one-half percentage point to 3 percent at that meeting. Just eight day earlier, the Fed, in an emergency session, slashed its rate by a rare three-quarters percentage point. The two rate cuts together marked the most dramatic rate reductions in a single month by the Fed in a quarter century.

Under its new economic forecast, the Fed said that it now believes the gross domestic product will grow between 1.3 percent and 2 percent this year. That's lower than a previous Fed forecast for growth, which at that time was estimated to be between 1.8 percent and 2.5 percent.

GDP is the value of all goods and services produced within the United States and is the best barometer of the country's economic fitness.

With economic growth slowing, the Fed projected that the national jobless rate will rise to between 5.2 percent to 5.3 percent this year. That is higher than the central bank's old forecast for the rate to climb to as high as 4.9 percent. Last year, the unemployment rate averaged 4.6 percent.

And, with energy prices marching upward, the Fed also raised its projection for inflation. The Fed now expects inflation to be between 2.1 percent and 2.4 percent this year. That's higher than its old forecast for inflation, which was estimated to come in at around 1.8 percent to 2.1 percent.

The Fed said its revised forecasts reflected a number of factors including "a further intensification of the housing market correction, tighter credit conditions .... ongoing turmoil in financial markets and higher oil prices."

The combination of slower economic growth and increasing inflation could complicate the Fed's work. The central bank is trying to keep the economy growing, while ensuring that inflation stays under control. The Fed's remedy for a weakening economy is interest rate cuts. To combat inflation, the Fed usually boosts rates.

Oil prices on Tuesday jumped to a new record - topping $100 a barrel. Consumer prices, meanwhile, rose by a bigger-than-expected 0.4 percent in January, according to new government figures released Wednesday.

Fed policymakers were mindful that they needed to keep a close eye on inflation, minutes of the Jan. 29-30 meeting said.

And, some policymakers noted that when prospects for economic growth improved, "a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate," according to the documents.

Still, all but one of the Fed's members agreed to lower rates by a half-point at that time.

Richard Fisher, president of the Federal Reserve Bank of Dallas was the sole dissenter. He preferred no change. The minutes showed that Fisher felt that the level of interest rates was already "quite stimulative, while headline inflation was too high."

The minutes also revealed that the Fed conducted a conference call on Jan. 9, where policymakers reviewed economic data and financial market developments, which were worsening. It did not lower interest rates at that time, although most policymakers were of the view that "substantial additional policy easing in the near term might well be necessary" to help brace the wobbly economy.

As the financial situation continued to deteriorate, worldwide stocks markets plunged and recession fears intensified, Bernanke convened an emergency conference call on Jan. 21. Fed policymakers believed "the outlook for economic activity was weakening," details of that conference call showed. The Fed decided to slash rates by a dramatic three-quarters of a percentage point and make the announcement on the following morning, Jan. 22.

Demonstrating the Fed's "commitment to act decisively" to support the economy might reduce concerns about the weakening economy that seemed to be contributing to the worsening state of financial markets, according to the minutes. However, there was some concern expressed that such a bold move "could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook," the documents showed.

William Poole, president of the Federal Reserve Bank of St. Louis, was the lone dissenter on the Fed rate cut announced on Jan. 22. He did not believe conditions justified a rate cut before the Fed's regularly scheduled meeting on Jan. 29-30, the minutes said.

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