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fed sees economy slowing cnn report

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    Fed sees economy slowing
    Central bank cuts growth forecast and sees higher unemployment but hints at more rate cuts ahead to keep economy from recession.
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    See all CNNMoney.com RSS FEEDS (close) February 20 2008: 2:46 PM EST



    Federal Reserve Chairman Ben Bernanke.

    NEW YORK (CNNMoney.com) -- The Federal Reserve cut its growth forecast for the economy and said it sees higher unemployment for the rest of 2008. But the minutes from the Fed's most recent meetings suggested that more rate cuts could be on the way to combat further economic weakness.

    The central bank said it now sees the economy growing at a rate between 1.3% to 2% this year, down from its previous forecast from October of growth between 1.8% and 2.5% for 2008.

    The Fed also said it expects the unemployment rate for the year to be between 5.2% and 5.3%, up from the 4.8 % to 4.9% range previously given. Unemployment stood at 4.9% in January, according to the latest reading from the Labor Department.

    This gloomier forecast, which was hinted at by Federal Reserve Chairman Ben Bernanke in testimony to the Senate Banking Committee last week, was released along with the minutes from the Fed's two meetings it held in January.

    The Fed slashed interest rates twice last month in an attempt to ward off a recession. It cut rates by three-quarters of a percentage point on January 22 following an emergency meeting the day before and followed that with a half-point cut on January 30.

    The minutes of the two-day meeting that concluded on Jan. 30 showed Fed policymakers discussing what further steps they might need to take due to growing risks to the U.S. economy.

    "With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risks to growth would remain even after this action," the Fed said, confirming market expectations that the Fed would lower rates again at its next meeting.

    Traders in federal funds futures were already pricing in a 100% chance of another quarter-percentage point cut at the Fed's March 18 meeting even before the release of the minutes.

    The Fed also discussed concerns that commodity prices have stayed higher than expected in the face of the slowing economy. But for the most part, the central bank seemed to dismiss inflation risks.

    The minutes said the Fed policymakers agreed the rate cuts "would likely not contribute to an increase in inflation pressures given the actual and expected weakness in economic growth and the consequent reduction in pressures on resources."

    However, other members pointed out that once growth prospects improved, the Fed may need to institute a "rapid" increase in interest rates to counter inflation.

    According to the minutes from the emergency meeting, at least one member argued the Fed should wait until its regularly scheduled meeting later that month to announce a rate cut.

    "Some concern was expressed that an immediate policy action could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook," read the minutes.

    This meeting took place while U.S. markets were closed for the Martin Luther King, Jr. holiday. But overseas markets were experiencing a steep sell-off that day, fueling fears that stocks would plunge on Wall Street when the U.S. markets resumed trading on January 22.

 
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