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The Honolulu Advertiser
Posted on: Thursday, February 21, 2008

Fed sees economy slowing, jobless, inflation rates rising

By Jeannine Aversa
Associated Press

Hawaii news photo - The Honolulu Advertiser

Ben Bernanke

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WASHINGTON — 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 Bernanke and his colleagues are concerned the economy could continue to weaken, even after their aggressive interest rate cuts in January, according to minutes of those private deliberations released yesterday.

"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," 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 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.

GDP is the value of all goods and services produced within the United States and is the best barometer of the country's economic fitness.

With economic growth slowing, the Fed projected that the national jobless rate will rise to between 5.2 percent and 5.3 percent this year. That is higher than the central bank's old forecast for the rate to climb as high as 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. That's higher than its old forecast for inflation, which was estimated at around 1.8 percent to 2.1 percent.

The Fed said its revised forecasts reflected 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."

The 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.

Oil prices yesterday climbed to a new record — topping $100 a barrel. Consumer prices, meanwhile, rose by a bigger-than-expected 0.4 percent in January.

While some believe inflation concerns could lead the Fed to cut rates by a modest one-quarter percentage point at its next meeting on March 18, many are still predicting another half-point reduction.

"Job No. 1 at the Fed is to right this potentially sinking ship even as inflation continues to percolate," said Richard Yamarone, economist at Argus Research. He and other economists believe the Fed was sending a message that the risk of recession outweighed the danger of inflation — for now, anyway.