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Fed more pessimistic about growth

- The Washington Times - Wednesday, May 21, 2008

WASHINGTON (AP) — The Federal Reserve today sharply lowered its projection for economic growth this year, citing blows from the housing and credit debacles along with zooming energy prices. It also expects higher unemployment and inflation.

Wall Street tumbled in response. But Fed officials, even with the more downbeat assessment, left the impression that they would not be inclined to cut interest rates further. The decision at the Fed's last meeting on April 29-30 to reduce rates was a "close call," according to minutes of those private deliberations released today.

The Fed hopes that its series of powerful rate cuts ordered since last September and the government's $168 billion stimulus package of tax rebates for people and tax breaks for businesses would help energize growth somewhat in the second half of this year.

Fed officials viewed economic activity "as likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of this year," the documents stated.

On Wall Street, the Dow Jones industrials plunged more than 180 points in afternoon trading.

Given the hope of a second-half economic pickup but worried about inflation, Fed officials signaled last month that their one-quarter-point rate reduction, which dropped their key rate to 2 percent, might be their last rate cut for some time.

"Most members viewed the decision to reduce interest rates at this meeting as a close call," the documents revealed. "Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices."

Under its new economic forecast, the Fed said it now believes gross domestic product will grow between just 0.3 percent to 1.2 percent this year. That's lower than a previous Fed forecast, released in late February, that estimated growth to be between 1.3 percent and 2 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.

These forecasts are based on what the Fed calls its "central tendencies," which exclude the highest three forecasts and the lowest three forecasts made by Fed officials. The Fed also gives a range of all forecasts that showed for GDP some Fed officials projecting no growth in 2008.

With economic growth slowing, the Fed projected that the national unemployment rate will rise to between 5.5 percent and 5.7 percent this year. That is higher than the central bank's old forecast for the rate to climb as high as 5.3 percent. Last year, the unemployment rate averaged 4.6 percent.

And, with energy prices marching upward, the Fed raised its projection for inflation. The Fed now expect inflation to be between 3.1 percent and 3.4 percent this year. That's higher than its old forecast for inflation, which was estimated to come in at around 2.1 percent to 2.4 percent.

Oil prices today blew past $130 a barrel for the first time. Gasoline prices moved closer to $4 a gallon.

At the Fed meeting in April, two members — Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas — opposed cutting rates, a crack in the usually unified front the Fed often shows the public.

Both men have a reputation for being especially vigilant about fighting inflation.

Against that backdrop, the Fed's documents indicated that their rate-cutting campaign may be winding down.

Looking ahead, some Fed members — not identified in the documents — 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, unless economic and financial developments indicated a significant weakening in the economic outlook."

Many economists believe the Fed will hold its key rate steady when it meets next, on June 24-25.

Fed policymakers, in recent speeches, have also been sending this signal.

Fed Governor Kevin Warsh, in remarks today, was the latest official to drive home this sentiment. "Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again," Warsh said, referring to the Fed's key rate.