Fed forecasts slower growth, more out of work in '08

WASHINGTON -- The housing collapse and credit crisis will slow economic growth and nudge up unemployment next year, the Federal Reserve said Tuesday in a first-of-its-kind forecast that some economists believe will lead to interest rate cuts early in 2008.

But don't count on a rates cut at the Fed's December meeting, analysts say. The Fed called its rate reduction in late October a "close call" and hinted its two cuts this year may be sufficient to energize the economy, according to minutes of the Oct. 31 closed-door meeting made public Tuesday.

"The economy is walking on a high wire. Eventually the Fed will have to cut rates again to put a net or a cushion under a falling economy," said Stuart Hoffman, chief economist at PNC Financial Services Group. He and other economists predicted more rates cuts early next year to prevent the possibility of the economy falling into a recession.

The Federal Reserve, in the first of its new quarterly economic reports to the nation, said it believes business growth will slow next year, with the gross domestic product (GDP) gaining between 1.8 percent and 2.5 percent. That would be weaker than how the Fed expects the economy to perform this year and would mark a downgrade to a previous projection released in the summer.

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

With economic growth slowing, the unemployment rate would rise to between 4.8 percent and 4.9 percent next year -- still low by historical standards. For all of last year, the jobless rate dipped to 4.6 percent, a six-year low.

The Fed said the "unemployment rate would increase modestly" in 2008, stabilize in 2009 and then decline slightly in 2010.