Fed lowers economic forecast By JEANNINE AVERSA,
AP Economics Writer
Wed Feb 20, 5:15 PM ET
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 at a time Federal
Reserve Chairman Ben Bernanke and his colleagues are concerned
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," according to minutes of the
Fed's Jan. 29-30 closed door meeting.
The Fed at that session voted to cut a key
interest rate by one-half percentage point to 3 percent. Just
eight days 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
and 5.3 percent this year. That is higher than the central
bank's old forecast for the rate to climb as high as 4.9 percent.
Last year, the unemployment rate averaged 4.6 percent.
And, with energy prices heading 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 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 Wednesday climbed 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.
While some believe inflation concerns could
lead the Fed to cut rates by a modest one-quarter percentage
point at its next meeting on March 18, many are still predicting
another half-point reduction.
"Job No. 1 at the Fed is to right this
potentially sinking ship even as inflation continues to percolate,"
said Richard Yamarone, economist at Argus Research. He and
other economists believe the Fed was sending a message that
the risk of recession outweighed the danger of inflation
for now, anyway.
On Wall Street, the hope of more rate cuts
lifted stocks. The Dow Jones industrials closed up 90.04 points.
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."
For next year, the Fed expects economic growth
to pick up a bit and for inflation to moderate. The unemployment
rate could ebb to 5 percent or hover as high as 5.3 percent,
according to the Fed's forecast.
The minutes also showed 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.