Fed: Slower growth, higher unemployment, higher inflation

WASHINGTON -- The Federal Reserve on Wednesday issued a downbeat assessment of the economy, predicting growth this year will be far slower than forecast just last fall, while inflation and unemployment will be higher.

The forecast was released in conjunction with the minutes from the Fed's Jan 29-30 meeting, at which Fed policymakers said they were growing increasingly worried about the economy, and "several" officials noted there was a very real possibility of an actual downturn.

"Several participants noted that the risks of a downturn in the economy were significant," the minutes of the meeting held January 29-30 said.

The risk of both slower growth and higher-than-anticipated inflation — as underscored by a separate report Wednesday showing rising consumer prices — puts the Fed in a bind as it tries to keep the economy from listing. The Fed has made deep interest rates cuts in the past six months to try to spur growth.

Stephen Cecchetti, professor at the Brandeis International Business School, notes that not only are prices rising, but consumer expectations for higher inflation are moving up — a bad sign for the Fed. "My hope is that one of two things will happen: Either economic slack will bring inflation down, or the financial system will recover quickly," Cecchetti said in an advisory. "In the first instance, low interest rates will be warranted; in the second, rates the Fed will have to as flexibly on the way up as it has been on the way down."

Most Fed officials also saw a greater risk chance that their new projections were too optimistic — rather than too pessimistic — given deepening problems in housing and credit markets and rising energy and commodity prices.

"The possibility that house prices could decline more steeply ... was perceived as a significant" potential problem, the Fed forecast said, adding that most officials "viewed the risks to their forecasts as weighted to the downside."

Central bank officials were "especially" worried about a scenario under which "weaker economic activity could lead to a worsening of financial conditions and a reduced availability of credit, which in turn could dampen economic growth."