The Federal Reserve last night slashed its US economic growth forecast for 2008 and signaled that mounting concerns over inflation would make further interest rate cuts unlikely.
"Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term," the Fed said in minutes from its April 29-30th policy meeting.
Fed officials said that cutting benchmark interbank lending rates by a quarter percentage point to 2 per cent at their last meeting was "a close call," reinforcing the impression that policy-makers may be putting further interest rate moves on hold.
In an accompanying forecast, the Fed cut its projection for 2008 growth to a scant 0.3 per cent to 1.2 per cent, down from the 1.3 per cent to 2 per cent it forecast three months ago.
At the same time, the US central bank said it expects inflation to remain "elevated" and unemployment to increase "significantly."
Wall Street stocks tumbled after the Fed forecast, with the Dow Jones industrials closing off nearly 1.8 per cent. Treasury debt prices also fell while the dollar eased against the euro and the yen.
US short-term interest rate futures expect no imminent change from the Fed, but point to rate increases in the final months of the year.
The minutes showed a Fed increasingly concerned about inflation and anticipating sluggish growth for a while, but cautiously optimistic the worst of the most serious financial crisis in years has passed.
"Much of the concern about severe disruptions to financial markets, which had motivated the aggressive policy actions at the beginning of the year, appears to have abated in the minds of most members," said Lehman Brothers economist Michael Hanson.
Given recent shocks to the economy, it could be years before growth rates and unemployment levels return to their optimal levels, the Fed said.
The interest rate cut on April 30th was the seventh in a series of that has taken the interbank lending rate down by 3.25 percentage points since September as the central bank moved to buffer an economy battered by the housing downturn and a credit crunch.