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US Fed slashes growth forecast

The US Federal Reserve on Wednesday slashed its US economic growth forecast for this year by a half percentage point, citing a housing slump, tight credit and higher oil prices.

The Fed sees the world's biggest economy growing in a range of 1.3 percent to 2 percent this year," appreciably below its trend rate."

This marked the second downward revision of output growth for this year since the central bank began issuing quarterly economic updates in November. In the initial report, the central bank lowered its output estimate by a three-quarter point to a 1.8 percent to 2.5 percent range.

The Fed said the "considerably lower" forecast was due to a number of factors, "including a further intensification of the housing market correction, tighter credit conditions amid increased concerns about credit quality and ongoing turmoil in financial markets, and higher oil prices."

The central bank highlighted the uncertainty of the outlook and analysts pointed out that economic conditions were rapidly deteriorating.

"The immediate and urgent issue that the Fed has to deal with in the next three months is that the growth outlook has deteriorated even since the updated central-tendency forecasts were assembled at the end of January," Global Insight economist Brian Bethune said.

The Fed said core inflation, excluding volatile energy and food prices, was expected to rise in a range of 2 percent and 2.2 percent, up from a prior estimate of 1.7 percent to 1.9 percent.

The report coincided with crude-oil prices hitting record peaks above US$101 as speculators piled into a bull run driven by supply fears.

"The Fed's main focus will remain the weakening economy and dysfunctional credit markets," Merrill Lynch economist David Rosenberg said.

"We continue to expect the Fed to keep cutting rates and still look for a 50-basis-points reduction in the funds rate on March 18," he said.

Wednesday's forecast was the second quarterly economic update under a new policy implemented by Fed Chairman Ben Bernanke to provide more timely views of the world's biggest economy.

The latest Fed GDP forecast was published with the minutes of the Federal Open Market Committee's (FOMC) Jan. 29 to Jan. 30 meeting, at which members trimmed a half point off the key federal funds interest rate, to 3 percent.

The Fed has cut 2.25 percentage points off the base rate since September amid financial market turmoil, including an emergency three-quarter-point cut on Jan. 22.

Bernanke told a congressional hearing last week that a US$168 billion economic stimulus law enacted earlier this month, which aims to boost consumer and business spending, would help lift growth later this year.

The minutes of last month's FOMC meeting showed that several members noted that "the risks of a downturn in the economy were significant."

"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" to cut 50 basis points from the fed rate, the FOMC minutes said.

Deutsche Bank economists Joseph LaVorgna and Carl Riccadonna said the message "suggests the Fed remains predisposed to cut rates again, and we believe the Fed is more inclined to do more rather than less, thus supporting a 50-basis-point cut as opposed to a 25 [basis point] cut," they wrote in a client note.
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