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Fed's Economic Forecast Gets Gloomier

Posted on: Thursday, 21 February 2008, 04:28 CST

By Sue Kirchhoff

WASHINGTON -- The Federal Reserve offered a downbeat view of the economy Wednesday, saying 2008 growth will be far slower than it forecast just months ago, while inflation and unemployment will worsen.

The gloomy outlook was underscored by new Labor Department reports showing consumer prices surged in January, and wage growth stagnated. The inflation rate was pushed up by rising food and health care costs. Despite the inflation pressures, a number of analysts expect the Fed to keep cutting interest rates to try to prevent recession.

Brian Bethune, economist for Global Insight, said Fed rate moves are far from over, noting, "Problems in the financial and credit markets have deteriorated," since last month, when the Fed pulled together its new outlook.

The Fed now projects that the economy will expand by 1.3% to 2.0% in 2008, "appreciably below" its potential. That's down sharply from its October projection of 1.8% to 2.5% growth. The economy grew by 2.2% in 2007.

The forecast, the consensus view of Fed governors and regional bank presidents, predicts unemployment will range from 5.2% to 5.3% in 2008, up from a 4.8% to 4.9% October projection. Inflation is expected to be 2.1% to 2.4%, compared with the previous 1.8% to 2.1% forecast. Core inflation, excluding food and energy, is now put at 2.0% to 2.2%, from the earlier 1.7% to 1.9% range.

Most Fed officials saw a bigger risk that their projections were too optimistic -- rather than too pessimistic -- given deep problems in housing and credit markets and rising commodity prices.

Fed officials were "especially" worried about a vicious cycle in which "weaker economic activity could lead to a worsening of financial conditions and a reduced availability of credit, which in turn could dampen economic growth."

The forecast includes the impact of business and personal tax cuts recently passed by Congress. Over time, Fed officials said their sharp interest rate cuts -- a key interest rate has been whittled to 3% from 5.25% in September -- would help stabilize the economy. But the range of projections indicates that there are widely divergent views within the central bank about how much growth will slow, and how fast it will rebound. Inflation could remain higher than some Fed officials prefer for several years.

The Labor Department consumer inflation figures showed prices up 4.3% in the past 12 months, and rising at a 6.8% annual rate in the past three months. Average weekly earnings, after inflation, fell 1.4% in the year ending in January.

St. Louis Fed President William Poole on Wednesday said the economy was "limping along." He expects to avoid a recession, though, "An economy growing at a barely positive rate will look and feel about the same as one with output falling slightly." (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.

Source: USA TODAY

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