The Federal Reserve (Fed) said Wednesday it had lowered its U.S. economic growth forecast for 2008, citing the deepening housing contraction and tight credit, and said risks of further setbacks are troubling. The central bank also expects higher unemployment and inflation. “The possibility that house prices could decline more steeply than anticipated, further reducing households' wealth and access to credit, was perceived as a significant risk to the central outlook for economic growth and employment,” the Fed said in its Summary of Economic Projections. Under its new economic forecast, the central bank said that it now believes the gross domestic product (GDP) will grow between 1.3 percent and 2 percent this year. The Fed's earlier forecast, released in November was for growth between 1.8 percent and 2.5 percent. With economic growth slowing, the Fed projected that the national unemployment rate will rise to between 5.2 percent and 5.3 percent this year. That is higher than the central bank's previous forecast for the rate to climb to as high as 4.9 percent. In 2007, the unemployment rate averaged 4.6 percent. With energy prices rising, the Fed also raised its projection for inflation. The central bank now expects inflation to be between 2.1 percent and 2.4 percent this year, higher than its previous forecast for inflation between 1.8 percent and 2.1 percent. The Fed said its revised forecasts reflected several 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 central bank's work. The Fed is trying to keep the economy growing, while ensuring that inflation stays under control. The central bank's remedy for a weakening economy is interest-rate reductions. To fight inflation, the central bank usually raises interest rates. The updated forecast comes amid concern by Fed Chairman Ben Bernanke and his colleagues that the economy could continue to weaken, even after their aggressive interest-rate reductions in January. “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,” notes from the Fed's late-January meeting showed.
