US Fed cuts growth forecast for 2008

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The Independent Online

The Federal Reserve has cut its forecast for economic growth in the US next year and warned of higher-than-expected unemployment, but minutes of the last interest rate policy-setting meeting provided few clues as to the central bank's next move.

Members of the Federal Open Market Committee (FOMC) said that their Hallowe'en rate cut had been a "close call" and there was more discussion than usual about inflationary pressures caused by the weak dollar.

However, all but one member voted for the quarter-point reduction, and economists noted that most of the time was spent fretting about the potential damage being done to the economy by the credit market crisis.

"Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity," the minutes said.

Financial markets are still predicting a further rate cut at the next Fed meeting, which would come on top of 75 basis points of easing since the credit crisis took hold in the summer. However, the language accompanying the 31 October move suggested that inflationary pressures and economic weakness were equally balanced, and subsequent policy speeches by FOMC members have poured cold water on hopes for another quarter-point cut. Traders said the balance of discussion suggested that FOMC members might be willing to ease further. The dollar fell to a record low of $1.48 against the euro after the release of the minutes and the downbeat forecasts.

Fulfilling a promise to increase transparency, the central bank was providing more details of its economic forecasts. It said business growth will slow next year, and GDP will be in the 1.8-2.5 per cent range, below the projection of 2.5-2.75 per cent, which it made in the summer. It slightly raised its predicted unemployment rate for 2008 to 4.8-4.9 per cent.

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