Fed Officials Cut 2008 Growth Forecasts to Range of 0.3%-1.2%

Fed Officials Cut 2008 Growth Forecasts to Range of 0.3%-1.2%

May 21 (Bloomberg) -- Federal Reserve officials reduced their projections for economic growth this year by almost a full percentage point and raised their forecasts for inflation amid curtailed bank lending and a record rise in the prices for oil and other commodities.

Policy makers estimate U.S. gross domestic product will increase by 0.3 percent to 1.2 percent this year, compared to the 1.3 percent to 2 percent growth they predicted in January, according to Fed records released today. Consumer prices, minus food and energy costs, are projected to rise by 2.2 percent to 2.4 percent, up from a range of 2 percent to 2.2 percent in the last forecast.

The new projections align with indications by Chairman Ben S. Bernanke and his colleagues on April 30 that they'll pause after the seventh consecutive interest-rate cut, betting that low rates and a federal tax rebate will revive growth. Fed Vice Chairman Donald Kohn said yesterday that the economy, while ``quite sluggish'' so far this year, will probably ``firm'' in the second half and quicken next year.

Officials expected ``much weaker'' growth in 2008 than last year, ``owing primarily to a continued contraction of housing activity, a reduction in the availability of household and business credit and rising energy prices,'' the Fed said.

The estimates, a median range of forecasts by Fed governors and regional-bank presidents, were presented at the Federal Open Market Committee's April 29-30 meeting in Washington. The forecasts were released along with the minutes.

Jobless Rate

Total inflation will run between 3.1 percent and 3.4 percent, the Fed said, compared with a January forecast of 2.1 percent to 2.4 percent. The fourth-quarter jobless rate will be between 5.5 percent and 5.7 percent, compared with 5.2 percent to 5.3 percent in the previous projections.

The forecasts are a compilation of views from 17 Fed officials, including Chairman Ben S. Bernanke, four other Fed governors and 12 district-bank presidents. There are two vacancies on the Board of Governors. The Fed report doesn't identify who made specific projections.

The Fed officials' forecast ranges indicate the ``central tendency,'' which eliminates the three highest and three lowest projections by the group of 17 people. This is the third set of expanded forecasts since the Fed doubled their frequency to quarterly, added a third year to the outlook and began predicting total inflation in addition to prices excluding food and energy. The Fed announced the change in November.

Risks to Outlook

In the ``Risks to the Outlook'' section of the revamped economic forecasts, the Fed said most officials saw their risks to growth projections as ``weighted to the downside'' and jobless-rate forecasts as ``tilted to the upside.'' On inflation, ``many'' officials saw a bigger risk of faster price increases, the Fed said.

The Fed forecasts contrast with those of economists outside the central bank. Those surveyed by Bloomberg News expect GDP growth of 1.2 percent this year, the median of 53 estimates taken from May 2 to May 8, based on an average annual pace. Forecasts range from 0.2 percent to 2.2 percent, and 25 of 54 economists project the economy will shrink in the second quarter.

The central bank's GDP projections represent the change from the fourth quarter of the prior year to the next fourth quarter.

The Fed lowered the benchmark overnight interbank lending rate by a quarter percentage point on April 30 to 2 percent. That capped off 2.25 points of reductions this year, the most aggressive cuts in two decades, including two moves by 0.75 point in January and March.

Unchanged Rate

Traders expect the Fed to leave the main rate unchanged through October, then start raising it. The FOMC will next update its forecasts at a June 24-25 meeting.

For 2009, Fed officials kept GDP growth projections little changed, resulting in a median range of 2.0 percent to 2.8 percent, compared with 2.1 percent to 2.7 percent in January. The jobless-rate forecast increased to a range of 5.2 percent to 5.7 percent, from 5 percent to 5.3 percent.

``For 2009, views differed notably about the pace at which output and employment would recover,'' the Fed report said.

Inflation projections, based on the Commerce Department's personal consumption expenditures price index, rose about a quarter percentage point for 2009 and were little changed for 2010.

For 2010, Fed officials gave growth projections ranging from 2.6 percent to 3.1 percent, compared with 2.5 percent to 3 percent in January. The range of jobless-rate forecasts widened, to 4.9 percent to 5.5 percent, from 4.9 percent to 5.1 percent.

The central bank provided historical error ranges for projections, saying the GDP forecasts have a 70 percent chance of ending up 1.0 percentage point above or below the projected paces. The confidence ranges for the unemployment-rate projections run from 0.4 percentage point above or below the forecast in 2008 to 1 percentage point in 2010.

That means there's a 70 percent probability that actual growth will be between negative 0.7 percent and positive 2.2 percent, based on the bounds of the central-tendency projections.

ΒLOOMBERG