WASHINGTON (AFP) — The Federal Reserve on Wednesday slashed its 2008 US economic growth forecast by a half percentage point, citing a housing slump, tight credit and higher oil prices.
The Fed sees the world's biggest economy growing in a range of 1.3 to 2.0 percent this year, "appreciably below its trend rate."
That marked the second downward revision of output growth for 2008 since the central bank began issuing quarterly economic updates in November. In the initial report, the central bank lowered its output estimate by a three-quarter point to a 1.8-2.5 percent range.
The Fed said the "considerably lower" forecast was due to a number of factors, "including a further intensification of the housing market correction, tighter credit conditions amid increased concerns about credit quality and ongoing turmoil in financial markets, and higher oil prices."
The central bank highlighted the uncertainty of the outlook and analysts pointed out that economic conditions were rapidly deteriorating.
"The immediate and urgent issue that the Fed has to deal with in the next three months is that the growth outlook has deteriorated even since the updated central-tendency forecasts were assembled at the end of January," said Global Insight economist Brian Bethune.
The Fed said core inflation, excluding volatile energy and food prices, was expected to rise in a range of 2.0 and 2.2 percent, up from a prior estimate of 1.7-1.9 percent.
The report coincided with crude-oil prices hitting record peaks above 101 dollars as speculators piled into a bull run driven by supply fears.
"The Fed's main focus will remain the weakening economy and dysfunctional credit markets," said Merrill Lynch economist David Rosenberg.
"We continue to expect the Fed to keep cutting rates and still look for a 50-basis-points reduction in the funds rate on March 18."
Wednesday's forecast was the second quarterly economic update under a new policy implemented by Fed chairman Ben Bernanke to provide more timely views of the world's biggest economy.
The latest Fed GDP forecast was published with the minutes of the Federal Open Market Committee (FOMC)'s January 29-30 meeting, at which members trimmed a half point off the key federal funds interest rate, to 3.00 percent.
The Fed has cut 2.25 percentage points off the base rate since September amid financial market turmoil, including an emergency three-quarter-point cut on January 22.
Bernanke told a congressional hearing last week that a 168-billion-dollar economic stimulus law enacted earlier in February, which aims to boost consumer and business spending, would help lift growth later this year.
The minutes of the January FOMC meeting showed that several members noted that "the risks of a downturn in the economy were significant."
"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" to cut 50 basis points from the fed rate, the FOMC minutes said.
Deutsche Bank economists Joseph LaVorgna and Carl Riccadonna believe that message "suggests the Fed remains predisposed to cut rates again, and we believe the Fed is more inclined to do more rather than less, thus supporting a 50-basis-point cut as opposed to a 25 bp cut," they wrote in a client note.
"And if the economy slips into recession, the funds rate is likely to go down to 2.0 percent, if not a bit less."
But some FOMC members, according to the minutes, noted that when growth prospects improve, a "rapid reversal" of easing rate actions might be needed.
Copyright © 2009 AFP. All rights reserved. More »
