WASHINGTON (AFP) — Federal Reserve staff predict the US economy will contract in the first half of 2008 amid worsening housing market and credit woes, minutes from a central bank meeting revealed Tuesday.
Such a downturn would be defined as a recession by most economists. Moreover, some policymakers at the central bank see the possibility of a "prolonged and severe" economic slump occurring.
The Fed minutes from to a March 18 policy meeting at which Fed policymakers slashed US short-term interest rates by three quarters of a percentage point to 2.25 percent paint a bleaker picture of the US economy.
"The staff projection showed a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half," the minutes stated.
A recession is typically marked by two straight quarters of negative gross domestic product (GDP).
The economy grew at a lackluster 0.6 percent annualized pace in the fourth quarter of 2007. A growing number of economists believe the economy has since fallen into a recession.
Fed chairman Ben Bernanke told Congress last Wednesday that it was possible the economy would fall into a recession during the first half of the year, but he said any downturn would likely be mild. The US last endured a recession in 2001.
The Fed minutes said, however, that there was a possibility that an economic malaise could be lengthy.
"Some (policymakers) believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market," the minutes said.
The central bank has slashed its key federal funds interest rate by three percentage points since September in a bid to fire up the ailing economy which is being battered by the housing downturn, a credit slump, high oil prices and rising job losses.
A government report Friday showed that US employers shed a surprisingly large 80,000 nonfarm jobs last month.
Economists expect such reports will spur Bernanke and his fellow policymakers to cut rates further at a policy meeting scheduled for late April.
The aim of Fed policymakers to try and keep the economy well-lubricated has been complicated by inflationary pressures and sky-high oil prices in recent months, although Bernanke has said he expects slowing growth to temper inflationary pressures.
The minutes said that rising prices for oil and other commodities, as well as stressed financial and housing markets, had weighed down the near-term economic outlook.
"Against this backdrop, many participants thought some contraction in economic activity in the first half of 2008 now appeared likely," the minutes said.
The deliberations from the policy meeting said that the slew of rate cuts and a giant 168-billion-dollar economic stimulus, recently approved by Congress and US President George W. Bush, should help growth rebound later this year.
Several participants at last month's meeting noted that it had become "increasingly difficult" to value complex mortgage-related securities amid the ongoing credit crunch which is roiling Wall Street.
The declining value of such securities has triggered multibillion dollar losses for some major banks and financial firms.
"The ongoing strains were likely to raise the price and reduce the availability of credit to businesses and households," the minutes said.
Economists are worried that consumer spending, already under pressure from the housing slump, could be dented further if the credit crunch persists.
Consumer spending is critical to US growth as it accounts for around two-thirds of all economic activity.
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