But the central bank, while stressing the uncertainty of the outlook, predicted the economy would pick up steam in 2009 and beyond.

Tame inflation, despite a bump-up this year driven by energy prices, was seen in the coming years, apparently paving the way for the inflation-wary Fed to continue lowering interest rates to offset slowing growth.

The Fed's sharp 2008 downward revision of an economy growing 'appreciably below its trend rate' followed a November update that saw a three-quarter-point reduction in output to a 1.8-2.5 per cent range.

The Fed said the 'considerably lower' forecast was due to a number of factors, 'including a further intensification of the housing market correction, tighter credit conditions amid increased concerns about credit quality and ongoing turmoil in financial markets, and higher oil prices.'

'The immediate and urgent issue that the Fed has to deal with in the next three months is that the growth outlook has deteriorated even since the updated central tendency forecasts were assembled at the end of January,' said Global Insight economist Brian Bethune.

Core inflation, excluding volatile energy and food prices, was expected to rise in a range of 2.0 and 2.2 per cent, up from a prior estimate of 1.7-1.9 per cent.

Still, core inflation was expected to moderate over the next two years amid 'fairly well-anchored inflation expectations,' the central bank said, an assessment that could signal a widely expected rate cut at its Mar 18 meeting.

'The Fed's main focus will remain the weakening economy and dysfunctional credit markets,' said Merrill Lynch economist David Rosenberg.

'We continue to expect the Fed to keep cutting rates and still look for a 50-basis-points reduction in the funds rate on Mar 18.'

Beyond 2008, the gross domestic product (GDP) growth outlook was brighter, buoyed by 'a gradual turnaround in housing markets,' an anticipated improvement of financial market strains, and the impact of easing monetary policy and future policy adjustments.

GDP predictions
The Fed predicted that 2009 GDP would expand in a range of 2.1 to 2.7 per cent, ratcheting down the bottom range of its prior 2.3-2.7 percent forecast.

Wednesday's forecast was the second quarterly economic update under a new policy implemented by Fed chairman Ben Bernanke to provide more timely views of the world's biggest economy.

The report coincided with crude-oil prices hitting record peaks above US$101 (S$143) as speculators piled into a bull run driven by supply fears.

The latest Fed GDP forecast was published with the minutes of the Federal Open Market Committee (FOMC)'s Jan 29-30 meeting, at which members trimmed a half point off the key federal funds interest rate, to 3.00 per cent.

The Fed has cut 2.25 percentage points off the base rate since September amid financial market turmoil, including an emergency three-quarter-point cut on Jan 22.

Mr Bernanke told a congressional hearing last week that a 168-billion-dollar economic stimulus law enacted in February, which aims to boost consumer and business spending, would help lift growth later this year.

The minutes of the January FOMC meeting showed that several members noted that 'the risks of a downturn in the economy were significant.'

'With no signs of stabilisation in the housing sector and with financial conditions not yet stabilised, the committee agreed that downside risks to growth would remain even after this action' to cut 50 basis points from the fed rate, the minutes said.

However, some members pointed out that when growth prospects had improved, a 'rapid reversal' of easing rate actions might be needed. -- AFP