Fed forecasts economic slowdown

Overall inflation should ebb next year to between 1.8 percent and 2.1 percent. 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 throughout the economy.

Oil prices last week hit a record high of $98.62 a barrel. They have ebbed a bit and are hovering above $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.

Meanwhile, the central bank’s decision on Oct. 31 to slice interest rates for a second time this year to combat housing and credit troubles was not necessarily an easy one for Fed officials.

“Many members noted that this policy decision was a close call,” the minutes revealed.

In the end, Fed Chairman Ben Bernanke and all but one of his colleagues agreed to lower its key interest rate by a one-quarter percentage point to 4.50 percent. It marked the second rate reduction in six weeks.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, was the sole dissenter at the meeting. He preferred no change in the funds rate. The smaller, October rate cut followed up a bolder, half percentage-point reduction in September, the first time the Fed had lowered its key rate in more than four years.

The decision to cut rates last month was seen by most Fed officials as a way to protect the business climate against the possibility that these problems could worsen and throw the economy into a recession.

“Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,” the minutes said.

Moreover, many Fed policymakers believed the rate cut could help calm still-fragile financial markets. Wall Street has been suffering through an especially turbulent period over the past several months due to the spreading credit troubles and the deepening housing slump.

Tuesday’s economic forecast was a fulfillment of 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 18½ 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.

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 policymakers’ thinking into the economy’s outlook and the risks facing it.

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.

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