SLOWDOWN: WASHINGTON (AP)— The Federal Reserve reported Tuesday that it expects slower economic growth and a slight bump up in unemployment next year due to the housing slump and a credit crunch. The board also said, however, that it thinks inflation will remain moderate. The fresh assessment of the country’s future economic performance was issued by the Fed in the first of its quarterly reports to the nation.
On the growth side, the Fed said it believes that business growth will slow next year, with the gross domestic product (GDP) coming in 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. The downgrade was due to a number of factors, including “the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than-expected housing data and rising oil prices,” the Fed explained. The credit crunch has both made it more costly and more difficult for people and companies to borrow money.
The worst carnage has occurred in the market for “subprime” home loans — those made to people with spotty credit histories. Credit problems started there and have spread to more creditworthy borrowers including those that are looking for home loans of more than $417,000, so-called jumbo loans. The overriding worry is that these housing and credit problems will make people less inclined to spend, dampening economic growth. That concern is on the Fed’s radar, too.
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