Published: November 19, 2008 02:14 pm            

Fed sharply lowers forecasts, hints of rate cut

WASHINGTON — The Federal Reserve on Wednesday sharply lowered its projection for economic activity this year and next, and signaled that additional interest rate reductions may be needed to help combat the worst financial crisis to jolt the country in more than a half-century.

With the economy forecast to lose traction, or even jolt into reverse, unemployment will move higher, the Fed predicted.

Facing the likelihood of "significant weakness" in the economy, some Fed officials suggested "additional policy easing could well be appropriate at future meetings," according to documents from the Fed's most recent closed-door deliberations on interest rate policy at the end of October.

At that Oct. 29 session, the Fed ratcheted down rates to 1 percent, a level seen only once before in the last half-century. Many economists predict the Fed will lower rates again at its last meeting of the year on Dec. 16, to help brace the sinking economy.

Even while hinting that another rate reduction could be forthcoming, Fed officials worried that the effectiveness of previous rate cuts "may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth," the documents said.

To help ease financial turmoil and spur banks to lend money more freely again to customers, the Fed has taken a series of other unprecedented steps, including offering short-term cash loans and buying up mounds of short-term debt that companies rely on to pay day-to-day expenses like payrolls and supplies.

Under its new economic forecast, the Fed now believes gross domestic product could be flat or grow by just 0.3 percent this year. GDP could actually shrink or expand by 1.1 percent next year. Both sets of projections are lower than the Fed's forecasts delivered to Congress in July.

GDP is the value of value of all goods and services produced within the U.S. and is the best measure of the country's economic health.

These forecasts are based on what the Fed calls its "central tendencies," which exclude the highest three forecasts and the lowest three forecasts made by Fed officials. The Fed also gives a range of all forecasts that showed some Fed officials projecting a 0.3 percent dip this year, followed by a deeper 1 percent contraction next year.

        

• Click to discuss this story with other readers on our forums.