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:
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.