Fed lowers growth forecast, raises inflation

By Mark Felsenthal and Glenn Somerville

WASHINGTON (Reuters) - The Federal Reserve on Wednesday slashed its U.S. 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 29-30 policy meeting.

Fed officials said that cutting benchmark interbank lending rates by a quarter percentage point to 2 percent at their last meeting was "a close call," reinforcing the impression that policy-makers may be putting further interest rate moves on hold.

"If you had any doubt that the Fed is signaling a pause, that doubt is gone," said Christopher Low, chief economist at FTN Financial in New York.

In an accompanying forecast, the Fed cut its projection for 2008 growth to a scant 0.3 percent to 1.2 percent, down from the 1.3 percent to 2 percent it forecast three months ago.

At the same time, the U.S. 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 .DJI closing off nearly 1.8 percent. Treasury debt prices also fell while the dollar eased against the euro and the yen.

U.S. short-term interest rate futures expect no imminent change from the Fed, but point to rate increases in the final months of the year.