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Fed Issues Gloomy Economic Forecast

The Federal Reserve on Wednesday lowered its projection for economic growth this year, citing damage from the double blows of a housing slump and credit crunch. It said it also expects higher unemployment and inflation.

The updated forecasts come amid worry by Federal Reserve Chairman Ben Bernanke and his colleagues that the economy could continue to weaken, even after their aggressive interest rate cuts in January, according to minutes of those private deliberations released Wednesday.

"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," minutes of the Fed's Jan. 29-30 closed door meeting showed.

The Fed at that session voted to cut a key interest rate by one-half percentage point to 3 percent at that meeting. Just eight day earlier, the Fed, in an emergency session, slashed its rate by a rare three-quarters percentage point. The two rate cuts together marked the most dramatic rate reductions in a single month by the Fed in a quarter century.

Under its new economic forecast, the Fed said that it now believes the gross domestic product will grow between 1.3 percent and 2 percent this year. That's lower than a previous Fed forecast for growth, which at that time was estimated to be between 1.8 percent and 2.5 percent.

GDP is the value of all goods and services produced within the United States and is the best barometer of the country's economic fitness.

Grocer Gal Samrai didn't need today's numbers to know inflation is heating up; it's burning up his profit. The cost of stocking his shelves with food goes up one shipment to the next.

"It's unbelievable," Samrai told CBS News correspondent Bill Whitaker. "Lately we've taken really a big increase from a lot of the suppliers."

Whitaker reports that in the last two years, the cost of flour has soared 27%, eggs a whopping 50% and milk - up 26% from just a year ago.

And it's not just at the grocery store. Last month rents went up across the country, hospital costs jumped and so did clothing and gasoline. The national average for a gallon of unleaded is now $3.04 versus $2.29 a year ago.

In other economic developments:

  • With economic growth slowing, the Fed projected that the national jobless rate will rise to between 5.2 percent to 5.3 percent this year. That is higher than the central bank's old forecast for the rate to climb to as high as 4.9 percent. Last year, the unemployment rate averaged 4.6 percent.
  • With energy prices marching upward, the Fed also raised its projection for inflation. The Fed now expects inflation to be between 2.1 percent and 2.4 percent this year. That's higher than its old forecast for inflation, which was estimated to come in at around 1.8 percent to 2.1 percent.
  • Oil prices on Tuesday jumped to a new record - topping $100 a barrel. Consumer prices, meanwhile, rose by a bigger-than-expected 0.4 percent in January, according to new government figures released Wednesday.
  • But retailers across the sector have been laying off staff and closing stores as consumers cut back on discretionary spending. The International Council of Shopping Centers projects 2008 store closings could reach 5,770 stores in 2008, the largest number of closings since 2004. Retailers as a whole reported their worst January same-store sales in almost four decades. Both Sharper Image, known for its high-tech novelty gadgets, and Lillian Vernon, which sells low-cost gifts and gadgets through its catalog and Web site, have long been plagued with falling sales.
  • The Labor Department reported that its closely watched Consumer Price Index posted a gain of 0.4 percent last month, matching the December increase and higher than the 0.3 percent rise that analysts had expected. Food costs jumped by the largest amount in 11 months, led by big gains for vegetables, fruit, poultry and pork.

    The Fed said its revised forecasts reflected a number of factors including "a further intensification of the housing market correction, tighter credit conditions ... ongoing turmoil in financial markets and higher oil prices."

    University of California, Irvine economist Peter Navarro told Whitaker that the combination of slower economic growth and increasing inflation could complicate the Fed's work.

    "Not only does it hit the consumer in the pocketbook, but it makes it very, very difficult for the Federal Reserve to basically stimulate the economy out of recession," Navarro said, "because all that'll do is exacerbating the inflation. It's called 'stagflation'."

    The central bank is trying to keep the economy growing, while ensuring that inflation stays under control. The Fed's remedy for a weakening economy is interest rate cuts. To combat inflation, the Fed usually boosts rates.

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