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.

SLOW RECOVERY

The minutes showed a Fed increasingly concerned about
inflation and anticipating sluggish growth for a while, but
cautiously optimistic the worst of the most serious financial
crisis in years has passed.

"Much of the concern about severe disruptions to financial
markets, which had motivated the aggressive policy actions at
the beginning of the year, appears to have abated in the minds
of most members," said Lehman Brothers economist Michael
Hanson.

Given recent shocks to the economy, it could be years
before growth rates and unemployment levels return to their
optimal levels, the Fed said.

The interest rate cut on April 30 was the seventh in a
series of that has taken the interbank lending rate down by
3.25 percentage points since September as the central bank
moved to buffer an economy battered by the housing downturn and
a credit crunch.

The economy has expanded at a sluggish 0.6 percent annual
rate in both the last three months of 2007 and the first
quarter of this year.

At the same time, however, record high oil prices have
pushed up energy and food prices, raising the consumer price
index
by 3.9 percent in the 12 months to April.

Policy-makers felt at their April meeting that the risks
that growth could slow were more closely balanced than in the
past by the risks that inflation could spike higher.

"Members were ... concerned about the upside risks to the
inflation outlook, given the continued increases in oil and
commodity prices and the fact that some indicators suggested
that inflation expectations had risen in recent months," the
Fed said.

DIFFERENCES OVER INFLATION RISK

Participants at the Fed's meeting were about evenly divided
as to whether the risks to the inflation outlook were balanced
or were tilted to the upside, the minutes said.

The Fed boosted its forecasts for inflation to 3.1 percent
to 3.4 percent in 2008 from its January 2.1 percent to 2.4
percent projection for the personal consumption expenditures
index. It expects unemployment to rise to 5.5 percent to 5.7
percent for the year. The jobless rate was at 5 percent in
March and employers had cut jobs for the fourth month in a row.

The Fed also warned that the risks to its scaled-down
growth projection remain to the downside, particularly if house
prices continue to slide lower.

"Participants saw little indication of a bottoming out in
either housing activity or prices," the minutes of the meeting
said.

Fed officials took some comfort from signs that fragile
credit markets, which have been severely shaken by doubts about
bad credit, appear to be on the mend.

"The generally better state of financial markets had caused
participants to mark down the odds that economic activity could
be severely disrupted by a further substantial deterioration in
the financial environment," the minutes said.

(Reporting by Mark Felsenthal and Glenn Somerville; Editing
by Gary Crosse)

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