[NYTr] Federal Reserve forecasts slower growth, higher unemployment

[All the News That Doesn't Fit]

AP - Nov 20, 2007
http://hosted.ap.org/dynamic/stories/F/FED_FORECAST?SITE=WSAW&SECTION=HOME&TEMPLATE=DEFAULT

Fed Reserve forecasts slower growth, higher unemployment rates in 2008

By JEANNINE AVERSA
AP Economics Writer

WASHINGTON (AP) -- The Federal Reserve reported Tuesday that it
expects slower economic growth and a slight bump up in unemployment
next year due to the housing slump and a credit crunch. The board also
said, however, that it thinks inflation will remain moderate.

The fresh assessment of the country's future economic performance was
issued by the Fed in the first of its quarterly reports to the nation.

On the growth side, the Fed said it believes that business growth will
slow next year, with the gross domestic product (GDP) coming in between
1.8 percent and 2.5 percent. That would be weaker than how the Fed
expects the economy to perform this year and would mark a downgrade to
a previous projection released in the summer.

The downgrade was due to a number of factors, including "the tightened
terms and reduced availability of subprime and jumbo mortgages,
weaker-than-expected housing data and rising oil prices," the Fed
explained.

The credit crunch has both made it more costly and more difficult for
people and companies to borrow money. The worst carnage has taken place
in the market for "subprime" home loans - those made to people with
spotty credit histories. Credit problems started there and have spread
to more creditworthy borrowers including those that are looking for
home loans of more than $417,000, so-called jumbo loans.

The overriding worry is that these housing and credit problems will
make people less inclined to spend, putting a damper on economic growth.

That concern is on the Fed's radar, too.

"Partly in response to declining housing wealth, the personal savings
rate was expected to rise over the next few years, contributing to
restraint" on the growth of consumer spending, the Fed said as it
provided more details about its projection for slower GDP growth in
2008.

GDP is the value of all goods and services produced within the United
States and is the best barometer of the country's economic fitness.

The unemployment rate would rise to between 4.8 percent and 4.9 percent
next year - still low by historical standards. A previous forecast
estimated the unemployment rate next year would be about 4.75 percent.
The unemployment rate currently stands at 4.7 percent. For all of last
year, it dipped to 4.6 percent, a six-year low.

With economic growth slowing, "the unemployment rate would increase
modestly" in 2008, stabilize in 2009 and then decline slightly in 2010,
the Fed said.

Overall inflation should ebb next year to between a 1.8 percent and 2.1
percent increase. Inflation should moderate further in 2009 and 2010,
the Fed said.

"Overall inflation was expected to edge down over the next few years,
fostered by an assumed flattening of energy prices," the Fed said.

So far, surging energy prices this year haven't touched off a major
inflation problem.

Oil prices last week hit a record high of $98.62 a barrel. They have
ebbed a bit and are hovering over $96 a barrel. Gasoline prices have
topped $3 a gallon.

The Fed's forecasts are based on estimates of activity in the final
quarter of one year compared with the same period of a previous year.

Tuesday's forecast was a fulfillment of Federal Reserve Chairman Ben
Bernanke's pledge to bring more openness to an institution that
historically has been enshrouded in secrecy.

It marked the biggest move yet by Bernanke to put his imprint on the
Fed, which he has been running since February 2006.

Alan Greenspan, Bernanke's predecessor - made progress on that front in
his 18 1/2 years, but Bernanke has sought to pry the door open even
further, providing investors, businesses and individuals with more
insights into the thinking of Fed policymakers.

Doing that helps the Fed do its job - keeping the economy and inflation
on an even keel.

Improving the public's understanding of the Fed's objectives and
strategies reduces uncertainty, allowing businesses and people to make
more informed financial decisions. If investors have a better
understanding of how Fed policy is likely to respond to incoming
information, stock prices and bond yields will tend to respond to
economic data in ways that further the central bank's objectives.

A research paper released Tuesday by Fed drove home the point that
forecasting is as much an art as it is a science.

"If past performance is a reasonable guide to the accuracy of future
forecasts, considerable uncertainty surrounds all macroeconomic
projections" - including those of Fed policymakers - the paper said.

Bernanke last week announced steps to bring greater openness to the
institution that historically has substantially operated behind closed
doors. With Tuesday's report, the Fed is now releasing quarterly
economic forecasts, versus twice-a-year projections. The Fed is also
saying what it thinks the business environment will be for the
following three years- not two. The Fed also is giving unprecedented
detail into what the thinking of the policymakers is about how they
expect the economy to perform and the risks facing it.

© 2007 The Associated Press.