- The Washington Times - Thursday, February 21, 2008


The Federal Reserve yesterday 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 S. Bernanke and his colleagues are concerned the economy could continue to weaken, even after their aggressive interest-rate cuts last month, according to minutes of those private deliberations released yesterday.

Also yesterday, the Labor Department said that its closely watched Consumer Price Index posted a gain of 0.4 percent last month, matching the December increase and higher than economists had expected.

Core inflation, which excludes food and energy, showed an increase of 0.3 percent, the biggest jump in this measure in seven months. The cost of clothing, education, lodging and tobacco also moved higher.

The Commerce Department said yesterday that construction of new homes and apartments rose by 0.8 percent to a seasonally adjusted annual rate of 1.012 million units in January. That was the first increase since October and followed a plunge of 14.8 percent in December.

However, applications for building permits, considered an indicator of where construction is headed, fell by 3 percent to an annual rate of 1.048 million units, the lowest level since November 1991. That was viewed as evidence that the nation’s troubled housing sector has yet to hit bottom.

“With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the Fed’s policy-making 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 thinks 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 of between 1.8 percent and 2.5 percent.

The Fed projected that the jobless rate will rise to between 5.2 percent and 5.3 percent this year, above the earlier forecast of up to 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, up from an estimated range of 1.8 percent to 2.1 percent.

The combination of slower economic growth and increasing inflation could complicate the Fed’s work. Ian Shepherdson, chief economist at High Frequency Economics, a private consulting firm, said the worse-than-expected news on inflation may prompt the Fed to cut interest rates by only a quarter-point at its next meeting on March 18 rather than the half-point move that markets have been expecting.

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