The Federal Reserve yesterday 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 as the Dow Jones Industrial Average fell more than 227 points. But Fed officials, even with the more downbeat assessment, left the impression they are not inclined to cut interest rates further. The decision at the Fed’s last meeting, April 29-30, to reduce rates was a “close call,” according to minutes of those private deliberations released yesterday.
The Fed hopes that its series of rate cuts ordered since September and the government’s $168 billion stimulus package of tax rebates for people and tax breaks for businesses will help spur growth 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,” according to the documents.
Hopeful for a second-half economic pickup but worried about inflation, Fed officials signaled last month that their quarter-point 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 predicts gross domestic product will grow between 0.3 percent and 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.
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 be 2.1 percent to 2.4 percent.
At the Fed meeting last month, two members - Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard W. 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 vigilant about curbing inflation.
Against that backdrop, the Fed’s documents indicated their rate-cutting campaign might be winding down.
Many economists suspect the Fed will hold its key rate steady when it meets next, June 24-25.
Please read our comment policy before commenting.