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
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
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
"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
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
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.