Fed predicts higher unemployment and inflation in 2008

WASHINGTON – The Federal Reserve on Wednesday 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.\nThe updated forecasts come amid worry by Federal Reserve Chairman Ben Bernanke and his colleagues that the economy could continue to weaken, even after their aggressive interest rate cuts in January, according to minutes of those private deliberations released Wednesday.\n“With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risks to growth would remain even after this action,” minutes of the Fed’s Jan. 29-30 closed door meeting showed.\nThe 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.\nUnder its new economic forecast, the Fed said that it now believes 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, which at that time was estimated to be between 1.8 percent and 2.5 percent.\nGDP is the value of all goods and services produced within the U.S. and is the best barometer of the country’s economic fitness.\nWith economic growth slowing, the Fed projected that the national jobless rate will rise to between 5.2 percent to 5.3 percent this year. That is higher than the central bank’s old forecast for the rate to climb to as high as 4.9 percent. Last year, the unemployment rate averaged 4.6 percent.\nAnd, with energy prices marching 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. That’s higher than its old forecast, which was estimated to come in at around 1.8 percent to 2.1 percent.\nThe Fed said its revised forecasts reflect a number of factors including “a further intensification of the housing market correction, tighter credit conditions .... ongoing turmoil in financial markets and higher oil prices.”\nThe combination of slower economic growth and increasing inflation could complicate the Fed’s work. The central bank is trying to keep the economy growing, while ensuring that inflation stays under control. The Fed’s remedy for a weakening economy is interest rate cuts. To combat inflation, the Fed usually boosts rates.\nOil prices on Tuesday jumped to a new record – topping $100 a barrel. Consumer prices, meanwhile, rose by a bigger-than-expected 0.4 percent in January, according to new government figures released Wednesday.\nFed policymakers were mindful that they needed to keep a close eye on inflation, minutes of the Jan. 29-30 meeting said.\nSome policymakers noted that when prospects for economic growth improved, “a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate,” according to the documents.\nStill, all but one of the Fed’s members agreed to lower rates by a half-point at that time.\nRichard Fisher, president of the Federal Reserve Bank of Dallas was the sole dissenter. He preferred no change. The minutes showed Fisher thought the level of interest rates were already “quite stimulative, while headline inflation was too high.”