WASHINGTON — Federal Reserve officials strongly suggested they won't be inclined to cut interest rates further even as they sharply downgraded their forecast for economic growth this year, citing damage from a housing slump, credit crunch and galloping energy prices.
Wall Street took a tumble as a result. The Dow Jones industrials plunged nearly 230 points, logging its widest two-day loss since late February.
Early in the day, stocks began falling on the surging price of oil, which shot up more than $4 and breached $134 a barrel for the first time on the futures market Wednesday.
The stock market slumped further after minutes from last month's Fed meeting revealed the central bank's decision to lower interest rates at its April 29-30 meeting was a "close call."
Lower interest rates spur economic growth, but they also tend to accelerate inflation.
The Dow fell 227.49, or 1.77 percent, to 12,601.19, after falling nearly 200 pointson Tuesday. The blue chip index has shed 3.3 percent over the two-day drop.
Broader stock indicators also stumbled. The Standard & Poor's 500 index fell 22.69, or 1.61 percent, to 1,390.71, while the Nasdaq composite index fell 43.99, or 1.77 percent, to 2,448.27.
Government bond prices rose as investors searched for safer assets. The yield on the 10-year Treasury note, which moves opposite its price, rose to 3.81 percent from 3.78 percent late Tuesday.
The Fed hopes that its series of powerful rate cuts ordered since last September and the government's $168 billion stimulus package of tax rebates for people and tax breaks for businesses will help energize growth somewhat in the second half of this year.
Fed officials viewed economic activity "as likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of this year," the documents stated. The Fed also forecast higher unemployment and inflation for this year.
Given the hope of a second-half economic pickup but worried about inflation, Fed officials signaled last month that their one-quarter-point rate reduction, which dropped their key rate to 2 percent, might be their last rate cut for some time.
"Most members viewed the decision to reduce interest rates at this meeting as a close call," the documents showed. "Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices."
Many economists believe the Fed will hold its key rate steady when it meets next, on June 24-25.
Looking ahead, some Fed members — not identified in the documents — 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, unless economic and financial developments indicated a significant weakening in the economic outlook," according to the Fed papers.
Separately, Fed Governor Kevin Warsh, in remarks Wednesday, also suggested the Fed was not inclined to cut rates again.
Under its new projections, the Fed now believes gross domestic product will grow between just 0.3 percent to 1.2 percent this year. That's lower than a previous Fed forecast, released in late February, that estimated growth to be between 1.3 percent and 2 percent. GDP is the value of all goods and services produced within the United States and is the best barometer of the country's economic fitness.