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Fed predicts slowdown in 2008
The forecast led analysts to believe further easing of rates is possible next year - but perhaps not in December.
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WASHINGTON - The housing collapse and credit crisis will slow economic growth and nudge up unemployment next year, the Federal Reserve said Tuesday in a first-of-its-kind forecast that some economists believe will lead to interest rate cuts early in 2008.
Don't count on a cut in rates at the Fed's December meeting, however, analysts say. The Fed called its rate reduction in late October a "close call" and hinted that its two cuts this year may be sufficient to energize the economy, according to minutes of the Oct. 31 closed-door meeting made public Tuesday.
Policymakers raised concerns at that meeting that inflation might flare up again in the short term, especially in the face of rising energy prices.
But with the Fed's longer-term forecast calling for moderating inflation next year and beyond, economists believe the central bank will have leeway to reduce rates next year.
"The economy is walking on a high wire. Eventually the Fed will have to cut rates again to put a net or a cushion under a falling economy," said Stuart Hoffman, chief economist at PNC Financial Services Group. He and other economists predicted more rate cuts early next year to prevent the possibility of the economy falling into a recession.
The Federal Reserve, in the first of its quarterly economic reports to the nation, said it believes business growth will slow next year, with the gross domestic product gaining 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.
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.
Several reasons led to the GDP downgrade, the Fed said, among them "the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than-expected housing data and rising oil prices."
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