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Fed lowers growth forecast, raises inflation view

Washington, May 22, 2008

The Federal Reserve has slashed its 2008 US economic growth forecast and signaled that mounting concerns over inflation would make further interest rate cuts unlikely.

'Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term,' the Fed said in minutes of its April 29-30 monetary policy meeting.

Fed officials said that cutting benchmark interbank lending rates by a quarter percentage point to 2 percent at their last meeting was 'a close call,' reinforcing the impression that they may be on hold with any further interest rate moves.

'If you had any doubt that the Fed is signaling a pause, that doubt is gone,' said Christopher Low, chief economist at FTN Financial in New York.

In an accompanying forecast, the Fed cut its projection for growth to a scant 0.3 percent to 1.2 percent in 2008, down from the 1.3 percent to 2 percent it estimated three months ago.

At the same time, the Fed -- the US central bank -- said it expects inflation to remain 'elevated' and unemployment to increase 'significantly.'    

Stocks tumbled, with the Dow Jones industrial average closing off 227 points, or nearly 1.8 percent, and Treasury debt prices pared losses on the Fed's forecasts. The dollar fell against the euro and the yen.

US short-term interest rate futures expect no imminent change from the Fed but point to rate increases in the final months of the year.

The Fed on April 30 lowered rates to 3.25 percent in the seventh in a series of reductions to the interbank lending rate since September as the central bank moved to buffer an economy battered by the housing downturn and a credit crunch.

The economy has expanded at a sluggish 0.6 percent annual rate in both the last three months of 2007 and the first quarter of this year.

At the same time, however, record high oil prices have pushed up energy and food prices, raising the consumer price index by 3.9 percent in the 12 months to April.

Policy-makers felt at their April meeting that the risks that growth could slow were more closely balanced by the risks that inflation could spike higher.

'Members were ... concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices and the fact that some indicators suggested that inflation expectations had risen in recent months,' the Fed said.

Participants at the Fed's meeting were roughly evenly divided as to whether the risks to the inflation outlook were balanced or were tilted to the upside, the minutes said.

The Fed boosted its forecasts for inflation to 3.1 to 3.4 percent in 2008 from its January 2.1 percent to 2.4 percent projection for the personal consumption expenditures index. It expects unemployment to rise to 5.5 percent to 5.7 percent for the year. The jobless rate was at 5 percent in March, but employers had cut jobs for the fourth month in a row.

The Fed warned that the risks to its scaled-down growth projection remain to the downside, particularly if house prices continue to slide lower.

'Participants saw little indication of a bottoming out in either housing activity or prices,' minutes of the meeting said.

Fed officials took some comfort from signs that fragile credit markets, which were severely shaken by doubts about bad credit, appear to be on the mend.

'The generally better state of financial markets had caused participants to mark down the odds that economic activity could be severely disrupted by a further substantial deterioration in the financial environment,' the minutes said. - Reuters




Tags: US growth | Fed |

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