US Federal Reserve sharply cuts growth forecast

The US Federal Reserve on Wednesday sharply cut its growth forecast for 2008 but suggested it may halt a string of drastic rate cuts aimed at boosting the sagging US economy.

The central bank predicted 2008 growth of 0.3 percent to 1.2 per cent, down from a January projection of 1.3 percent to 2 percent, according to the minutes of the Federal Open Market Committee's April 30 meeting.

The Fed cut its benchmark interest rate by 0.25 percentage points to 2 percent at the April meeting, but the minutes indicate that inflation risks made it a difficult decision.

Consumer prices were projected to increase by 3.1 to 3.4 percent in 2008, up from 2.1 to 2.4 percent inflation expected in Fed's January forecast.

'Most members viewed the decision to reduce interest rates at this meeting as a close call,' the Fed minutes said. 'Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook.'

Two of the board's 10 members voted against April's rate cut.

The economy expanded by 0.6 percent in the first quarter according to initial government estimates. Some economists believe the US has entered a recession.

The Fed's federal funds rate has been cut from 5.25 percent to two percent since September to combat a housing and mortgage crisis that has engulfed the world's largest economy.

Fed Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 3.5 percent.

The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis