• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Fed Lowers Outlook for Growth in 2008

Posted on: Wednesday, 21 November 2007, 06:00 CST

By Sue Kirchhoff

WASHINGTON -- On Tuesday, the Federal Reserve cut its forecast for growth in 2008, though it predicted the nation would avoid a recession and inflation would calm down. Central bank officials emphasized, however, that the housing downturn, credit crunch and possibility of slower consumer and business spending posed risks to the outlook.

The Fed also released minutes of its Oct.31 meeting, indicating that its decision to cut its target for a key short-term interest rate a quarter-point was a "close call."

Fed officials voted for the rate cut to provide "additional insurance against an unexpectedly severe weakening in economic activity" and noted they could reverse the move if needed.

The Fed has cut the federal funds rate, what banks charge each other for overnight loans, from 5.25% to 4.5% since September in an effort to stabilize the economy. The rate is a benchmark for many consumer and business loans, so lowering it is meant to encourage borrowing and spending.

The updated assessment was the Fed's first quarterly report on inflation, unemployment and growth, part of Chairman Ben Bernanke's plan to make the Fed more open. Along with the near-term analysis, the three-year forecast indicates Fed officials see a 1.6% to 1.9% inflation rate as a longer-term goal.

The forecast reiterated Bernanke's recent prediction that the economy will slow through the end of 2007. In 2008, the Fed expects growth of 1.8% to 2.5%, "notably below" its 2.5% to 2.75% forecast in June. The range of growth forecasts among Fed regional bank presidents and Fed governors ranged as low as 1.6% and as high as 2.6%.

Unemployment, 4.7% in October, is expected to rise to 4.8% to 4.9% next year, staying near that range through 2010. Overall inflation will gradually moderate from about 3% this year to 1.6% to 1.9% in 2010.

The forecast says Fed officials viewed growth risks as "weighted to the downside," noting that markets remain strained and that economic weakness could lead to further credit tightening, "which could in turn slow the economy further." The forecast appears to put more emphasis on the risk to growth than the Fed's statement after the Oct.31 meeting, which called the risks of higher inflation and slower growth roughly balanced.

Brian Bethune of Global Insight says his firm expects the economy to grow about 2% in 2008, near the bottom of the Fed's range. Bethune says the Fed outlook looks "a little rich" and predicted the central bank would have to cut rates again.

Mark Zandi of Moody's Economy.com says while he expected the economy to skirt a downturn, "Right now, it feels more likely than not that the economy is devolving into recession." (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.

Source: USA TODAY

More News in this Category