Fed cuts US 2008 growth forecast

The US housing market is experiencing a slowdown

The US Federal Reserve has cut its forecast for 2008 economic growth to a range of 1.8% to 2.5% - due to tight credit markets and weakness in housing.

In July it had predicted annual growth of between 2.5% and 2.75%.

The forecast was the first quarterly update delivered under a new policy implement by Fed boss Ben Bernanke.

The Fed's comments came as it also revealed that a decision to cut interest rates at its last meeting had been "a close call".

In recent weeks a number of big banks have reported heavy losses on the back of exposure to sub-prime mortgage loans while government data has shown that demand for hosing continued to be weak.

Analysts had been widely expecting the growth forecast to be trimmed, though some thought the prediction may have been less optimistic.

"A growth of 1.8% or even 2.5% at the high side, I thought was still really pretty high," said Mary Ann Hurley of D A Davidson & Co.

"I'm not an economist, I'm just a trader, but 2.5% seems high to me for everything that's going on in the economy."

'Valuable assurance'

Interest rates were trimmed by 25 basis points to 4.5% in late October in an effort to revitalise the economy which has been hit by crisis in the housing market.

Meanwhile the virtual jamming up of world credit markets over the summer has seen merger and acquisitions activity drying up.

There were concerns that the rate cut, and the 50 basis points cut seen in September would fuel inflation.

But the Fed said that while it expected growth to slow and to see a slight rise in unemployment, it expected that inflation would remain moderate.

The minutes showed that most members of the rate-setting committee thought a second rate cut, after the half-point in September "would provide valuable additional insurance against an unexpectedly severe weakening in economic activity".

Only Kansas City Federal Reserve Bank president Thomas Hoenig voted for no change in the rate, saying he thought monetary policy should be "slightly firm to better hold inflation in check".

'Dollar-supportive'

The minutes showed policymakers felt that overall inflation would edge down in the next few years.

However they noted that the rising price of energy and other commodities, as well as the dropping value of the dollar could "exert upward pressure on prices of some core goods and services".

The successive interest rate cuts have seen the value of the dollar fall as investors look to other currencies for greater returns. "The rate-cut decision was a close call and that's going to be dollar-supportive," said Ron Simpson of Florida-based Action Economics.

Most analysts agreed that the minutes suggested there were no plans to cut rates again next month.

"They may do, but they are not laying the ground work in these minutes that they plan to do it," said Westpac strategist Richard Franulovich.