WASHINGTON – The Federal Reserve expects economic growth to slow sharply next year, and policymakers there are worried that even this forecast may prove too optimistic, according to an assessment that the central bank released yesterday.
In a new effort to be more open, the Fed released a detailed forecast that summarized the predictions of the Fed governors and regional bank presidents.
It also reported their disagreements, which almost all centered on how much the broad economy is likely to be damaged by the surge in oil prices and the tight credit markets brought on by the recent severe problems in housing and mortgage lending.
At the same time, Fed officials expect unemployment to rise only slightly and inflation to edge down. In a shift from three weeks ago, the officials said they agreed that recent evidence of slowing inflation was more than a temporary blip and would “likely be sustained.”
Neither the forecast nor newly released minutes from the Fed’s last meeting on Oct. 31 mentioned the chances of a recession, but the new predictions are low enough that, if borne out, the economic situation might feel like a recession to many people.
The forecast, which was much anticipated, did nothing to end the battle of wills between Fed officials and Wall Street over the need to reduce interest rates for a third time this year when the rate-setting Federal Open Market Committee meets next, on Dec. 11.
Investors did not seem to know how to react to the information. Share prices initially dropped after the report was released, possibly in reaction to the reluctance that the policymakers had expressed toward cutting rates last month. But prices bounced back and ended the day modestly higher, possibly in response to the Fed’s reduced alarms about inflation.
The Dow Jones industrial average rose 51.70 points, or 0.40 percent, to 13,010.14, after making 100-point swings in both directions. That followed Monday’s drop of more than 200 points. Many Nasdaq or small stocks were flat or lower.
Fed officials have signaled in recent speeches that they do not want to cut rates anytime soon, saying their cuts in September and October would be enough to keep the economy out of recession.
Indeed, many of them were already uneasy about their last cut in the benchmark federal funds rate on Oct. 31, to 4.5 percent from 4.75 percent. According to the minutes of that meeting, Fed bankers saw that decision as a “close call.”
But many investors continue to bet heavily on a rate cut in December, and some economists and Wall Street analysts argue that the economy will come much closer to stalling than the Fed now assumes.
“I think what we’re really debating here is the timing,” said Stuart Hoffman, an economist at PNC Financial in Pittsburgh. “Whether or not it happens on Dec. 11, my guess is that by the March meeting, the Fed funds rate will be 4 percent.”
The new forecasts for growth next year in the gross domestic product range from 1.6 percent to 2.6 percent. That is both lower and more uncertain than in June, when the forecasts ranged from 2.5 percent to 3 percent.