The Federal Reserve slashed its outlook for US economic growth next year on Tuesday and suggested that its members are unsure about future interest rate cuts in a report that left financial markets perplexed.
The central bank, in its first quarterly update under a new policy implemented by Federal Reserve Chairman Ben Bernanke, projected growth next year in a range of 1.8 percent to 2.5 percent down from 2.5 percent to 2.75 percent.
The forecast was revised from a semiannual report in July, under a new policy ordered by Bernanke to provide more frequent updates on the economic outlook.
The revisions "stemmed from 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 said.
Wall Street reacted negatively to the report, but later recovered.
"These very wide ranges startled the markets to some extent, and it is not clear how to interpret them from a forward-looking policy perspective, other than the reality that there is an unprecedented level of uncertainty about the outlook," said Brian Bethune, economist at Global Insight.
Bethune said despite the Fed's noncommital position, he expects the central bank to lower borrowing costs further after two reductions that brought the federal funds rate to 4.5 percent.
"The downside risks to the outlook far outweigh the upside risks," he said. "Thus the Fed's central tendency forecast does look a little rich to us at the current conjuncture, and for that reason we are forecasting that the Fed will reduce the federal funds rate by at least an additional 25 basis points by early 2008."
The Fed report projected core inflation expectation next year to 1.70 percent to 1.90 percent, down from 1.75 percent to 2 percent.
For the first time, the Fed made an estimate for headline inflation, which includes food and energy prices that are removed from the core number. The Fed sees headline inflation at 1.80 percent to 2.10 percent next year.
The Fed's specific expectations for GDP growth and inflation next year are new, but largely in line with its more general pronouncements earlier this year that growth next year would be slower than this year.
The report also included forecasts to 2010, showing sluggish growth rates over the next three years. It said 2009 growth would be in a range of 2.3 percent to 2.7 percent and pick up to between 2.5 percent to 2.6 percent in 2010.