The US Federal Reserve last night slashed its forecast for the growth of the world’s biggest economy, as it weighted the toll from tightening mortgage and housing markets and rising oil prices.

The Dow Jones Industrial Average sank and the euro reached a fresh high against the dollar, after the minutes of the Fed’s October meeting showed that the US central bank predicted growth next year would be between 1.8 per cent and 2.5 per cent, sharply down from a 2.5 per cent to 2.75 per cent range forecast in June.

Despite the risk of a sharper slowdown, the Federal Open Markets Committee said that fears over inflation its vote for a quarter-point cut in interest rates had been a “close call”, dashing hopes for further monetary loosening in December.

“Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,” the minutes said.

With energy prices rising, Fed members said they wanted to “underscore” the upside risks to inflation. One member of the 12 strong committee voted against the cut in rates, preferring to leave policy unchanged.

But analysts said the hawkish minutes did not rule out further cuts in rates if conditions continued to deteriorate.

Michael Malpede, a senior currency strategist at Man Global Research, said: “That the last decision was a close call is old news, I think. I don’t think the market is going to back off looking for a rate cut soon.”

The minutes also revealed for the first time that the Fed is working towards an unofficial inflation target of 1.5 to 2 per cent, as measured on the so-called personal consumption expenditures (PCE) price index. That was where Fed members forecast that inflation would be by 2010.

Ben Bernanke, the Fed chairman, said last week that the Fed would start producing quarterly economic forecasts spanning three years, in an attempt to provide a clear idea of what infalation level the Fed wants its decisions to deliver.

The move brings the Fed’s approach closer to that of the European Central Bank, the Bank of England and other central banks which have an explicit inflation target.

Overall inflation should stabilise next year to between 1.8 per cent per cent and 2.1 per cent, the Fed added, assuming energy prices flattened out. Core inflation is currently 1.8 per cent.

With economic growth slowing, “the unemployment rate would increase modestly” in 2008, stabilise in 2009 and then decline slightly in 2010, the Fed said. GDP growth would average between 1.6 per cent and 2.6 per cent over the next three years, it added.[XREF]<QA0>

Freddie Mac, page 61

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive