Fed posts gloomy outlook for economy, jobs through 2009

WASHINGTON -- The Federal Reserve on Wednesday dramatically reduced its forecast for economic growth into 2010, predicting significantly higher unemployment and lower inflation, and suggesting more interest rate cuts are likely.

In newly released minutes of its Oct. 28-29 meeting, some Fed officials suggested additional interest rate cuts "could well be appropriate at future meetings" and said rate reductions were justified to ease borrowing costs and forestall the possibility of deflation — a sustained, downward fall in prices.

A quarterly summary of economic projections, released in conjunction with the minutes, paint a downbeat picture. The consensus forecast of the Fed's Board of Governors and 12 regional bank presidents noted the economic outlook had "worsened significantly" since its previous forecast, in June

The Fed officials, who pulled together the projections at a meeting last month, "expected that (economic growth) would remain very weak next year and that the subsequent pace of recovery would be quite slow; they also anticipated that the unemployment rate would increase substantially," according to the report.

The Fed also predicted that "financial market stresses would recede only slowly, notwithstanding the extraordinary measures that had been taken" by the central bank to provide liquidity to banks and other financial firms.

Overall, the Fed's projections anticipate that gross domestic product, the broadest measure of goods and services produced in the USA, will be flat to up a scant 0.3% for all 2008, compared with June projections of 1% to 1.6% growth.

For 2009, the Fed's central forecast is GDP anywhere from a negative 0.2% to positive 1.1% growth, compared with June's prediction for growth in a 2.0% to 2.8% range. The economy is projected to pick up in 2010 to a healthier 2.3% to 3.2% pace.

Economic growth declined at an annual rate of 0.3% from July-August, according to the most recent government report.

The Fed's outlook is similarly bleak when it comes to employment. The Fed now expects the unemployment rate to range from 6.3% to 6.5% in 2008, up from a 5.5% to 5.7% outlook in June.