NEW YORK (Fortune) -- Freddie Mac chief Richard Syron wants to avoid a government bailout for many reasons. A filing the struggling mortgage giant made Friday lists over 10 million of them.

Syron made $10.6 million last year, according to Freddie Mac's latest report with the Securities and Exchange Commission. The company disclosed the information in a filing that clears the way for Freddie (FRE, Fortune 500) to raise $5.5 billion from investors to shore up its balance sheet.

A spokeswoman says the company has no immediate plan to raise capital. But a new slug of investor funds, whenever they come, could go a long way toward easing fears that the company could be headed for a government bailout - and reduce uncertainty about the ramifications of the mortgage crisis for Freddie's execs, employees and investors.

Syron made by far the biggest sum at the Reston, Va., company, pulling down a $1.2 million salary and a $3.45 million cash bonus, in addition to millions more in stock awards and other compensation for a total of $10.6 million.

Using a pay-disclosure measure that the SEC prefers, which treats the value of stock and options differently, Syron's pay for 2007 was $18.3 million, up 24% from a year ago.

Syron is hardly the only executive making out at Freddie. Six other executives or former executives made at least $2 million last year, the filing shows: Finance chief Anthony Piszel, business chief Patricia Cook, technology exec Michael Perlman, multifamily sourcing exec Michael May, former operating chief Eugene McQuade and ex-technology officer Joseph Smialowski.

Freddie spokeswoman Sharon McHale says the company's board sets pay with the help of consultants who review the compensation at similar financial companies.

"The board looks at a number of factors," she says, listing some of the criteria - including market share gains and improved financial disclosure - that are laid out in the filing.

Critics of the company and its larger sibling, Fannie Mae (FNM, Fortune 500), have long called for the so-called government-sponsored enterprises, or GSEs, to scale back their operations in the name of reducing the risk to the taxpayers who are understood to implicitly stand behind the companies' multitrillion-dollar debt obligations. The companies have been able to brush off those calls so far, and indeed they have been expanding their share of the mortgage market amid a historic downturn in the housing market.

But any use of federal funds to support the companies could expose them to much greater oversight. Rep. Barney Frank told The Wall Street Journal that using taxpayer funds could cause Fannie or Freddie to seek government clearance "before it can even pay its water bill for the toilet."

A tougher watchdog could get involved with the companies' executive pay practices. Early last year, Sen. Chuck Hagel questioned Fannie chief Daniel Mudd's $14 million paycheck for 2006, noting that Fannie at the time was still struggling to bring its books up to date. In May, regulators said Fannie had "substantially completed its remediation."

Even shy of a government infusion, the companies could soon face tighter pay oversight. A housing bill recently approved in the Senate would create a more powerful new regulator for the companies, with greater oversight of pay practices than the current regulator, the Office of Federal Housing Enterprise Oversight.

Calls for executive pay to be reined in at Fannie and Freddie have re-emerged since Treasury Secretary Henry Paulson announced last Sunday that he would seek congressional support for a measure that would authorize the Treasury to buy the companies' stock and increase their credit lines.

The possibility of taxpayer support for Fannie and Freddie caused Chris Whalen, who covers the banking industry for the Institional Risk Analytics investment research firm, to say the government should nationalize Fannie and Freddie, wiping out existing shareholders and making explicit the government's backing of the firms' debt.

After that, he wrote in a report this past week, the firms should be "merged and slowly shrunk down to the minimum size required to operate the two pieces of the business that actually support the housing mission."

Paulson has said he wants the companies to retain their current form, so for now there is no prospect of proposals like that coming to fruition.

Still, there is some sense that perhaps top execs are making too much, given the companies' financial ills. Sen. Joe Lieberman, appearing on a morning talk show on MSNBC, was asked how the companies can pay their leaders millions of dollars annually if taxpayers are being asked to support them.

"I don't know that we can pay them like we pay a normal civil servant because they these are big trillion-dollar operations," Lieberman said in his July 16 appearance on the cable channel's "Morning Joe" show. "But we're going to have a right on behalf of the taxpayers to go in there and set some limits on the salaries that executives of these two institutions have. I've looked at them and they're outrageous."

NEW YORK (CNNMoney.com) -- The latest hit to the economy could come from state houses and city halls across the nation, which are in their worst budget crisis in years.

With falling revenue from sales and income taxes, and property-tax declines looming, states, cities and towns have already laid off tens of thousands of government employees. Many expect more job cuts ahead as public officials struggle to balance their budgets.

The American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year.

All but four states are set to begin their new fiscal years on July 1, which means that tough decisions will have to be made soon. Economists say that cutbacks in jobs and spending by local governments could be a major drag on the overall economy.

"This isn't a wrecking ball to a healthy economy, but it could be the straw that broke the camel's back," said Bob Brusca, economist with FAO Economics in New York.

There are 29 states, including California, Florida and Ohio, facing a combined budget shortfall of at least $48 billion in the fiscal year that starts July 1, according to the Center on Budget and Policy Priorities (CBPP), a liberal think tank.

The National Association of State Budget Officers estimates that spending by all 50 states will be up 1% in fiscal 2009. But that would be the third lowest increase in the past three decades.

There are nearly 20 million state and local government employees in the country. So a 1% decline in employment at cities, towns, schools and states would result in a job loss of almost 200,000 people, a much larger amount than we've seen from battered sectors such as automakers or home builders in the past two years.

Even in states, towns and cities not yet laying off people, hiring freezes and early retirement packages are now common, said Robin Prunty, senior director in the public finance department of credit rating agency Standard & Poor's.

"The biggest cost they face is related to personnel," she said. "You typically do have some downsizing."

Tennessee plans to cut 2,000 positions, or about 5% of that state's work force, according to the CBPP. New Jersey is looking at cutting, 3,000 jobs while Ohio may trim 2,700 positions. The Detroit News reports that Detroit may lay off 1,300 workers after July 1 if the City Council doesn't sell the Detroit-Windsor Tunnel.

Brusca said many of the local governments facing the biggest squeeze are in Michigan and Ohio, which already have the weakest local economies, causing the unemployment situation in those hard-hit areas to worsen further.

What's more, Kerry Korpi, director of research for the American Federation of State, County and Municipal Employees, said local governments are faced with a downturn in tax revenue at the same time that there is greater demand for many of the social services they provide.

At the same time, many local governments are also grappling with much higher expenses due to rising fuel prices.

The 2001 recession was tough for state and local governments because even after the economy started to pick up, job losses continued for nearly two years.

But property tax revenues increased during that downturn as home prices and housing construction boomed.

Sales taxes, income taxes and property taxes each make up roughly a third of the tax collections from state and local governments, according to CBPP.

This local government budget crisis is likely to be more severe, according to experts, because the bust in home building and the decline in home prices will cut into property tax collections.

And it will probably get worse before it gets better -- even if the national economy starts to show signs of improvement.

That's because income and property taxes are likely to see declines lag the current slowdown. Sales tax declines are an early sign of a weakening economy.

But the drop in income taxes from job losses this year might not hit government revenue until next year while a drop in property taxes from a house being sold in the foreclosure process might not be felt in property tax collections for more than a year.

Still, the problems are already serious enough to cause widespread budget problems and repeated downward revisions in spending plans.

"Some budgets were out of balance almost immediately upon being introduced," said S&P's Prunty.

The city of Vallejo, Calif. filed for bankruptcy last month due to a ballooning budget deficit from soaring employee costs and declining tax revenue. Labor contracts with the city's unions were part of the problem but the city's plunging real estate market also was a factor.

Home values in Vallejo are down 24% year-over-year and 91% of homeowners who bought in the past two years have mortgages larger than their home's value, according to real estate site Zillow.com.

While Vallejo's housing problems are an extreme, they are not unique to that San Francisco suburb. Experts say the hit to property taxes that lays ahead for many cities could make this local government budget crisis the worst in nearly 30 years.

That's more bad news for an overall economy already fighting enough headwinds.

"The potential is there for this to be fairly prolonged," said Prunty. 

NEW YORK (CNNMoney.com) -- With a nationwide average gas price of just about $4 a gallon, lots of people are thinking there must be something the government can do to help.

Some things which contribute to high gas prices are largely out of the government's control. OPEC will produce as little oil as it sees fit, largely independent of any U.S. intervention. Developing nations will continue to subsidize gas prices, helping their growing economies and keeping demand high.

Areas where the government can help, like a big push into alternative energy, more drilling in the United States, or a jump in fuel efficiency standards, will take years to materialize. Even then, any price decline is likely to be small.

As consumers scramble to adjust their lives to deal with high gas prices, experts debate what the government can do to help in the short term.

It's unclear if any of the ideas being discussed will work. Some say Americans will just have to deal with $4 gas and learn to use less of it.

Tax oil companies more, give the money to motorists. This idea is a central part of Barack Obama's energy platform.

The candidate would impose a windfall profits tax on the big oil companies whenever oil crossed the $80 a barrel mark. The cash would be given to low income people to help them offset their energy costs.

Other proposals in the Senate include selling rights to emit greenhouse gasses - known as carbon credits - and giving the proceeds to all households making under $100,000 a year.

But opponents say raising taxes on oil companies will result in less oil production, and ultimately lead to higher prices. If the government didn't tax oil companies and simply borrowed the cash,that would only hurt the dollar, and send oil prices higher. more

Limit oil speculation. Many people believe oil speculators are essential to a properly functioning market.

But some say they have too much free rein and should be subject to greater restriction.

"The amount of money going into oil speculation is driving the price," said Judy Dugan, research director at Consumer Watchdog.

Dugan is calling for increasing the amount of money oil investors need to put up to buy contracts. She also wants more disclosure of trading positions held in overseas or electronic markets.

Dugan may be on to something. The Commodities Futures Trading Commission recently said it is requiring greater disclosure, and oil prices backed off nearly $9 from recent highs.

But opponents urge caution. They say supply and demand are driving high oil prices. Fewer speculators in the market, they say, will just make it harder to secure contracts and make it easier for a single player to manipulate prices. More.

Ease refining restrictions. Refineries seem to be in a perpetual mess. They currently have to make over 40 types of gasoline blends to meet clean air requirements in different areas. They are also only running at about 85%capacity.

Easing clean air requirements or reducing the number of blends made might bring down prices.

"It's obviously a trade off with environmental concerns," said John Kilduff, an energy analyst at MF Global in New York. "But it might take some of the stress off refiners."

Dugan is also calling for more information about refiner's profit margins, and perhaps laws requiring them to make more gas.

But the industry says making all those different blends actually doesn't cost that much more money. And other analysts say refiners are barely turning a profit running at 85% capacity, as gasoline prices have not risen as much as the price of crude oil. more

Lift the ethanol tariff. Ethanol from places like Brazil, made with sugar cane that packs more energy than U.S. corn-based ethanol, is currently subject to a54-cent a gallon tariff, designed to protect the domestic ethanol industry from foreign competition.

Since ethanol is a required component in gasoline, critics of the tariff say lifting it would mean cheaper gas for everyone.

But with ethanol making up less than 10% of the nation's gasoline supply, any drop in gas prices would likely be minimal.

Open the Strategic Petroleum Reserve. Congress recently directed the Bush administration to stop filling the reserve to the tune of 70,000 barrels a day, or 0.3% of the nation's daily oil consumption.

Analysts said the amount of oil involved was too small to have any effect on prices. They were right: oil prices actually rose following the directive.

Some say releasing oil from the reserve, located in giant salt caverns along the Gulf of Mexico and holding over 700 million barrels of oil, would send a message to traders that the government is not willing to let oil prices go up forever.

But others say the reserve serves an important role as a buffer against supply disruptions from overseas, and traders would bid up prices if the reserve were smaller. More.

Suspend the gas tax. This idea was roundly criticized when proposed first by John McCain and later by Hillary Clinton.

Analysts said doing away with the 18.4 cent per gallon federal gas tax over the summer would leave road repair dangerously underfunded, and could even lead to higher gas prices as people drove more.

Still, the idea has it's backers.

"I thought it maybe wasn't a bad idea," said Kilduff, who noted that eliminating state taxes as well - which currently average an additional 21 cents a gallon - could translate into minor savings for motorists. More.

The fact that these proposals have so many caveats, and would likely bring prices down only moderately or not at all, leaves some analysts saying there's not much the government can do to lower prices.

High gas prices are here to stay, and consumers are just going to have to bear the burden until they figure out how to use less fuel, they say.

"Like the president said, it's an addiction," said Lee Schipper, a visiting scholar at University of California Berkeley's Transportation Center. "There's going to be a time when going cold turkey hurts."

Moreover, even if the government could lower prices, it might not be in everyone's long-term interest.

"It's only when the price is high that people actually do things" to conserve, said Schipper. "Gas at $2 a gallon underprices the real cost to the environment and the nation."

NEW YORK (CNNMoney.com) -- John McCain and Barack Obama have starkly different philosophies about tax policy - how to raise the revenue needed to support government programs, spur growth and ensure economic fairness.

But voters really want to know one thing: How would the presidential candidates' views trickle down to their tax bills? A report released Wednesday by a nonpartisan policy group in Washington, D.C., takes a big first step toward answering that question.

According to the Tax Policy Center's findings, the common assumptions most people make about the plans of McCain, the presumptive Republican nominee, and Obama, the Democrats' pick, are not wildly off-base.

McCain: The average taxpayer in every income group would see a lower tax bill, but high-income taxpayers would benefit more than everyone else.

Obama: High-income taxpayers would pay more in taxes, while everyone else's tax bill would be reduced. Those who benefit the most - in terms of reducing their taxes as a percentage of after-tax income - are in the lowest income groups.

Under both plans, all American taxpayers could pay a price for their tax cuts: a bigger deficit. The Tax Policy Center estimates that over 10 years, McCain's tax proposals could increase the national debt by as much as $4.5 trillion with interest, while Obama's could add as much as $3.3 trillion.

The reason: neither plan would raise the amount of revenue expected under current tax policy - which assumes all the tax cuts expire by 2011. And neither plan would raise enough to cover expected government costs during those 10 years.

"Distributionally, they're markedly different. But in terms of their impact on revenue, the two plans are not terribly different," said Roberton Williams, principal research associate at the Tax Policy Center and the former deputy assistant director for tax analysis at the Congressional Budget Office.

Advisers from both campaigns told CNNMoney.com in e-mails that they would comment on the center's findings, but they had not done so as of Wednesday morning.

In addition to making the 2001 and 2003 tax cuts permanent, McCain says he would double the exemption for dependents, lower the corporate tax rate, make expensing rules more generous for small businesses and lessen the bite of the estate tax and Alternative Minimum tax.

The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $1,200. That means their after-tax income would rise by 2%.

But those in the lowest income groups would only see their after-tax income rise by less than 1% (or between $19 and $319). By contrast, the highest-income households - those with incomes of at least $603,000 - would see a boost in after-tax income of 3.4%, or more than $40,000.

Obama's plan would keep the 2001 and 2003 tax cuts in place for everyone except those making more than $250,000, and he would increase the capital gains tax.

Obama would also introduce new tax breaks for lower and middle-income groups. Such breaks include expanding the earned income tax credit, giving those making less than $150,000 a $500 tax credit per person on the first $8,100 in income, giving those making under $75,000 a 50% federal match on the first $1,000 of savings, and exempt seniors making less than $50,000 from having to pay income tax.

Like McCain, Obama would lessen the bite of the estate tax and the Alternative Minimum Tax, but to a lesser degree.

The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $160 under Obama's plan. That means their after-tax income would rise by 0.3%.

But those in the lowest-income groups would enjoy the biggest after-tax income rise as a percentage of income - between 2.4% and 5.5% (worth between $567 and $1,042). By contrast, the highest-income households - those with at least $603,000 in income - would see a dramatic decline in their after-tax income - a drop of 8.7%, or $116,000.

Williams said the Tax Policy Center analysis should be viewed as a work in progress. Researchers plan to update it as they get more information about the plans from the campaigns and if the candidates introduce new tax policies between now and Election Day.

The center will also incorporate the tax elements of McCain's and Obama's healthcare proposals when they update their findings.

How the candidates' tax plans would affect economic growth is an open question. "It depends on how the deficits are closed," said Tax Policy Center director Len Burman in a call with reporters.

NEW YORK (CNNMoney.com) -- Times are tough. The economy is weakening, consumer confidence is at a low and Americans are struggling just to buy basics like gas and groceries. So when it comes to getting goods that fall beyond the bare necessities, shoppers are getting smarter.

Not only has scouring the Web for the best possible price become standard protocol before buying a big-ticket item, but more consumers are employing creative strategies for scoring hot deals on everything from stereos to sweat pants.

Comparison shopping, haggling and swapping discount codes are all becoming mainstream marks of savvy shoppers. And retailers are playing along.

Swapping online coupons or discount codes is one quick way to score a reduced price. Often simply applying the right coupon or promotion code during the online payment process can mean a savings of 10% to 30% or at least free shipping.

"People are feeling a bit of squeeze and are looking for ways to save money without cutting back their spending," said Barry Boone, owner of currentcodes.com and naughtycodes.com.

Web sites like currentcodes.com list discount codes for a number of online retailers from Amazon to Zappos. If you find a code to an online store you're shopping at, just copy it and paste it into the "promotional code" box in the checkout area of the retailer's Web site.

Printable coupons, which can be used in stores, are also readily found online at various Web sites and blogs like printable-coupons.blogspot.com and wow-coupons.com.

And sellers are taking note, offering more coupons more often as the coupon sharing sites surge in popularity.

According to a recent survey conducted by retailmenot.com, 63% of respondents said they would not make a purchase if there was no deal attached. The coupon site expects 4 million visitors in May, up 260% from a year ago, according to co-founder Bevan Clark.

Clark says the savings shouldn't end there. He urges online shoppers to check a comparison service like pricegrabber before making a purchase, and then go to a coupon sharing site "to really stack on the savings," and lastly, watch for any future price drops with a price protection service like priceprotectr.com. Many retailers will refund the difference if the price of a product is reduced within two weeks after the purchase is made.

That's what he calls a "Triad of Shopping Awesomeness."

Awesome deals can be found inside brick-and-mortar stores as well. Whether it is expressly stated or for those in the know, boutiques and big box stores alike are often willing to price match or offer a discount to reel in those that are ready to buy.

Circuit City and Sears not only have price matching policies, but they will undercut a lower advertised price by taking off an extra 10% of the difference. Plus, if customers catch a lower advertised price from another local store within 30 days of the purchase, the chains will refund 100% of the difference.

Even luxury retailers are willing to do what it takes to compete. A sales manager at Montmartre, a high-end clothier in New York City, said that even though it's not written in the store policy, they will match lower prices from other retailers on request and also give a 10% discount to their "VIP" customers, which include those that shop at the store regularly or have reached a certain spending threshold. Not a bad deal for a $400 dress or pair of $190 designer jeans.

In light of the current economic conditions, the store recently added more clients to the VIP list, the manager said, hoping to boost sales.

Even outright haggling - once restricted to flea markets and car dealerships - has become acceptable in the mass retail marketplace.

Most store policies on bargaining are informal, but shoppers with the nerve to ask about flexible pricing may just save some serious cash.

A good place to start is to ask to speak with a manager. Often a sales associate will defer to the store manager, who has more leeway to cut deals. Open the discussion by asking if the listed price is the best possible deal.

Electronics retailer P.C. Richards is willing to negotiate on everything from air conditioners to HDTVs. With a little prodding, a sales manager agreed to take 10% off the retail price of a Garmin Nuvi 200W GPS System, which comes to about $30.

There is more flexibility to haggle on products that have been on display and show some wear, such as shoes or sports equipment. A garment displayed on a mannequin or an item in a store window might come with a discount if it's missing original labels or packaging.

Electronics sold "out of the box" are also a source of great bargains, and usually have little more wear than a few fingerprints. Though they are generally missing instructions, these can often be easily downloaded online.

A manager at Best Buy said he would knock 10% off the price of a product if the box had been opened - even if it was in perfect working order.

At PC Richards, a manager slashed the price of the display model on a navigational system by 50% - not bad by bargain hunting standards.

NEW YORK (CNNMoney.com) -- Only a few years ago, Americans who considered themselves middle class were scrimping to pay for their kids' college education.

Now, many of them are struggling to cover far more basic needs - gas and groceries.

Take Stacy and Chuck Burris. The Pittsburgh, Pa., couple view themselves as solidly middle class. In recent months, however, they've felt anything but.

Burdened by high cost of food and fuel, they are having trouble balancing their budget even though Chuck Burris earns a "comfortable salary"as a software engineer. The parents of five children, three of whom are grown, have essentially stopped eating out and entertaining and are considering canceling the annual family vacation to Maine. They keep to a Spartan shopping list and have planted a larger garden. Instead of buying their 12-year-old daughter summer clothes, they are turning her pants into shorts by cutting off the legs and getting hand-me-downs from family.

Never before in previous recessions have they had to cut back like this.

"We are struggling to stay in the same place," said Stacy Burris, 47. "You don't mind pinching pennies to send your kids to college. You do mind pinching pennies when it's simply to buy some eggs."

Many others nationwide are feeling similarly strapped. Recent consumer sentiment studies and polls show that Americans feel worse about their financial situations and the economy than they have in decades, even as economists debate just where things stands. And people don't expect things to improve anytime soon.

"Consumers are very financially stressed, more than what's indicated by the job and income statistics," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

Personal finances worsening

High fuel and food costs, coupled with miniscule raises and shrinking home values, led more people to report that their personal finances have worsened than at any time since 1982, according to a recent consumer survey by Reuters and the University of Michigan.

The future looks grim to them, too. Just one in five households surveyed expect their finances to improve during the next year, the least favorable in half a century. Three-quarters of those surveyed said they expected the nation's economic troubles to continue over the next year, the highest level since 1980. They predict the unemployment rate will jump by one percentage point to 6.0% by year end.

A survey from the Conference Board released Tuesday found that only 13.4% of respondents said they expect their incomes to rise in the next six months, the lowest level since the study began 41 years ago. Their inflation expectation has hit an all-time high.

Consumers' perceptions matter. Their dour view is prompting many to rein in spending and avoid incurring additional debt, with the fewest people planning to buy furniture, appliances and home electronics since the early 1980s, the Michigan survey found. The percent planning to take a vacation in the next six months also hit a record low, according to another recent Conference Board report.

"Consumers are the ones in trouble here," said Paul Ashworth, senior U.S. economist with consulting firm Capital Economics.

Looking at government statistics, however, things don't look that dire, which is one reason why economists are dickering over whether the country is in a recession. Unemployment is at a relatively low 5% and inflation is running at a modest 3.9%. The economy expanded at an estimated 0.6% in the first quarter, weak but still in growth territory.

Most experts are predicting more bad times ahead, but there's still no consensus on whether the economy is facing recession. Federal Reserve officials lowered their expectations for growth, but still kept it in positive territory, according to minutes released last week from a recent board meeting. Moreover, many economists say that if there is a recession, it will be mild and short.

Consumers, on the other hand, don't feel that way. Many are being pummeled by plummeting home values, a weak stock market and soaring grocery and gas costs.

Feeling the pain at all income levels

Hoyt of Economy.com argues that every income strata is feeling it. The wealthy are hurting from the roiling stock market, the middle class from falling home prices and working folks from rising prices.

Food prices, for instance, climbed 5.1% over the past 12 months and April's 0.9% rise was the largest in 18 years, according to the Consumer Price Index. Gas, meanwhile, hit its highest recorded price of $3.937 on Monday, up nearly 21% from a year ago and 9.7% over the past month, according to AAA.

Meanwhile, Americans aren't feeling flush. Home values have plummeted more than 14% in the past year, according to the S&P Case/Shiller Home Price Index, which tracks 20 of the largest markets. That's the sharpest rate in two decades. And wages are basically stagnant, rising only 0.6% between the first quarter of 2000 and the same period this year on an inflation-adjusted basis. Wages have actually fallen behind inflation for the past seven months, according to Jared Bernstein, senior economist at the Economic Policy Institute, a liberal leaning think tank.

"Folks are having considerable difficulty making their personal family budgets given their pay and prices," said Bernstein, who recently wrote Crunch: Why Do I Feel So Squeezed? "The prices they face most commonly in day-to-day life are rising faster than both inflation and their paychecks."

Their investment portfolios aren't doing well, either. The Standard & Poor's 500 index is down nearly 9% over the past year. And the value of Americans' stock and mutual fund holdings fell by $186 billion in the first quarter, the first drop since 2003's bear market.

All this financial stress comes at a time when most Americans have the thinnest savings cushion to fall back on. They have been loading up on debt in recent years, drawing on the equity in their homes, in particular. The percentage of their disposable income that goes toward debt payments is at 14.3%, near the all-time high.

"Consumers need to get their financial house in order," Hoyt said.

Uncertainty hard to deal with

Weighing even more heavily on consumers is uncertainty about where the economy is headed, said Ken Goldstein, economist with The Conference Board. It's unusual to have such slow growth for so many months and Americans don't know how to respond.

"What's really pushing consumers into a funk is the fear of what's coming next," Goldstein said. "You can't be sure you know exactly where we are or where we're going. Consumers are afraid that the light at the end of the tunnel is an oncoming train."

That's exactly how Chris Ackerman feels. He said that he and his wife, who live just outside Seattle, findthat their paychecks no longer cover their rent, student loans and daily living expenses. That is forcing the young couple to turn to their credit cards to make ends meet.

They've already cut out much of their entertainment and trips to visit her family and friends 30 miles away. If gas and grocery prices continue to rise, Ackerman, who works for an importer, said he'll have to stop contributing to his 401(k) plan. He doesn't see many other options.

"The worst part is looking to the future," said Ackerman, 25. "What if everything keeps getting worse. That's the scariest part. Is my grocery bill going to double again? What will we do?" 

NEW YORK (CNNMoney.com) -- It's getting harder and harder to deny that the economy is in recession.

Warren Buffett, the world's most famous investor, proclaimed this weekend that "we are already in a recession."

Former Federal Reserve chairman Alan Greenspan told the Financial Times on Monday that there is a greater than 50% chance of a recession.

But with all due respect to the Oracle of Omaha and the Maestro, they are not telling us anything that the average American consumer didn't already know: this economy stinks.

Whether the economy is technically in recession is missing the point. Consumer confidence is anemic. Home prices continue to fall. The unemployment rate has risen sharply over the past few months. Food and energy prices are soaring.

In fact, gas prices have run up so much that Americans are even starting to give up on their love affair with the automobile: the Federal Highway Transportation reported yesterday that Americans drove 11 billion miles less this March than a year ago.

We may not find out for several months if the National Bureau of Economic Research, the official arbiter of recessions, decides to label this economic rough patch an actual recession. And the economy may not ultimately decline for two consecutive quarters, a shorthand definition.

Gross domestic product eked out a 0.6% gain in the first quarter, according to the first reading of that figure released last month. An update is due out Thursday and economists have a revised forecast of 0.9% growth.

So the most pertinent question now for consumers and investors should not be if we will enter a recession but how long will it last?

Buffett and Greenspan are divided on that question. Buffett, speaking in the German weekly Der Spiegel, said that the recession "will be deeper and longer than what many think" while Greenspan said to the FT that "the probability of a severe recession has come down markedly."

So how can two financial legends have diametrically opposed views on the economic outlook? Well, these are confusing economic times. Even the Federal Reserve seems to be uncertain of what's next.

On the one hand, the credit crunch that paralyzed financial institutions late last year and earlier this year seems to be ebbing.

Wall Street has been responding well to this development: the S&P 500 is up about 7% since mid-March, when investor fears were greatest. That's right around the time that JPMorgan Chase (JPM, Fortune 500) agreed to "rescue" Bear Stearns (BSC, Fortune 500).

And the Fed also seems to think the worst may be over on Wall Street. It has indicated that it probably won't cut further its benchmark federal funds rate, which currently sits at a relatively low 2%.

That should be good news for investors. In a note to clients Tuesday morning, Harris Private Bank chief investment officer Jack Ablin pointed out that since 1984, the S&P 500 has gained, on average, 21.5% in the 12 months following a final Fed rate cut in a cycle. "History suggests that the S&P 500 enjoys strong gains once the Fed puts their interest rate ax away," Ablin wrote.

A sustained upswing in stocks could go a long way toward lifting consumer sentiment, especially since many consumers have seen the value of another key asset, housing, fall in the past few months.

But the central bank is also growing increasingly worried about inflation in food and energy dragging down the economy. The Fed's series of rate cuts have weakened the dollar and some economists suggest that the greenback's sluggishness is the main culprit behind the spike in commodity prices.

Even one of the Fed's policymakers shares that view.

According to the minutes of the Fed's April policy meeting, released last week, Dallas Federal Reserve president Richard Fisher suggested he "was concerned that...lowering the funds rate had been pushing down...the dollar, contributing to higher commodity and import prices, cutting real spending by businesses and households, and therefore ultimately impairing economic activity."

The Fed also updated its economic forecasts for 2008 last week and the picture isn't pretty: the central bank reduced its growth target for the year while also boosting its forecast for both inflation and unemployment.

So which is it? Is the downturn almost over because banks are recovering their footing? Or is the recession only beginning thanks to runaway price increases at the supermarket and pump?

Personally, I think it's an encouraging sign that, despite many economic problems, consumer spending has held up relatively well during the past few months. In addition, the government reported today that new home sales, while still at a historically weak level, rose unexpectedly in April. Any signs of life in the moribund housing market has to be viewed as a positive

And as I've argued in several recent columns, the fact that many big corporations have ample amounts of cash that they are using on mergers as well as to buyback stock and increase dividends is a good thing. Unlike prior recessions, Corporate America may help to keep the economy afloat even if consumers pull back.

NEW YORK (CNNMoney.com) -- When Don Cressman opened his monthly credit card statement, he was shocked to find some exorbitant fees added onto his bill.

"I was charged an over-limit fee when the interest charge kicked my account over my limit," said Cressman, 53. When Cressman called his credit card issuer to complain, they refunded the charge. "I was told that in future I would 'just have to watch my balance,'" he recalled.

Americans hold $850 billion in credit card debt, and the average balance per card-holding household is $8,568, according to the Consumer Federation of America.

Even borrowers who pay their bills on time can fall victim to deceptive practices used by the card issuers and get slammed with rising interest and hidden fees, which have become the industry norm in recent years. Such practices can make it extremely difficult for consumers to ever emerge from credit card debt.

"The issuers have gotten a lot more trigger happy over the last few years," according to Curtis Arnold, founder of CardRatings.com, a consumer advocacy group.

Consumers aren't the only ones who are fed up. Regulators are starting to take notice too. The credit card industry has been under fire lately by various government agencies. The Federal Reserve and members of Congress have proposed new legislation that might force lenders to rein in some of their deceptive billing tactics and make their fees more transparent to customers.

Most credit card holders are well aware that missing a payment can result in a hefty late fee, which ranges from $15 to $39. But meeting a payment deadline isn't always easy. Credit card companies reserve the right to change the date of your deadline with little notice or specify an exact time of day that payment is due. Trying to stay on top of an early morning deadline or due dates that change unexpectedly often leave even the most responsible customers saddled with charges.

Those that have never exceeded their spending limit may also be unaware that going above your credit limit will result in an over-the-limit fee (up to $39) without warning. Like Don Cressman, many consumers who stopped charging when they neared their limit find that the interest rate and additional charges are what pushed their account over the line.

As if the late fees, over-the-limit fees and the interest charges themselves weren't steep enough, there are also a slew of sneaky tactics that credit card companies can use to make sure you keep paying additional charges, even when you pay off your bill.

For example, many banks calculate finance charges using what's called double-cycle billing, a confusing practice that averages out the balance from your previous two bills. So if you carry a balance and pay a finance charge one month, you'll get hit with a finance charge on your next bill as well, even if you've paid off the balance.

Then, there's a practice known as "trailing interest" - another "gotcha" to watch out for, Arnold said. If you send in a payment according to the full amount on your statement, you may find that you still owe a small balance next month. That's because you accrued interest between the time you sent the payment and when it was posted to your account.

And all it takes is one delinquent payment to cause the credit card company to up your interest rate, often substantially. But thanks to a widely-used practice called universal default, you could end up with a higher interest rate, even if you pay on time. Credit card issuers can increase your interest rate - even if you have a perfect payment history - just because you missed a payment on another card or bill.

Because of the scrutiny, some card issuers are beginning to lighten up on their fee structures and billing practices. For example, in spring of 2007 Citigroup announced it would stop using universal default and JPMorgan Chase followed suit in November. But until sweeping legislation is passed, there are a few things consumers can do to avoid getting hit the next time.

For starters, Chris Viale, president and CEO of Cambridge Credit Corp., a nonprofit credit counseling agency based in Agawam, Mass., suggests calling each credit card company to nail down your credit limit, due date and interest rate.

Card-issuing companies, such as American Express (AXP, Fortune 500), Capital One (COF, Fortune 500), Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) also disclose all of this information either online, under the terms and conditions for each card, or in the account disclosure statement you receive when you first open an account.

The important point is to "get familiar of the terms of each of your cards and get them down on paper," Viale said.

If you are having problems call customer service. "There is so much spotlight on this industry right now [credit card companies] are being a lot more careful about negative publicity," Arnold said, referring to the practices lawmakers like Sen. Christopher Dodd, D-Conn., dub unfair and deceptive. "Use the publicity as leverage."

Many card companies are willing to lower your interest rate, raise your limit or waive a fee as a one-time courtesy if you ask nicely.

"We strongly encourage our customers to engage with us directly" said a representative from CitiCards. "Particularly if they have questions about their card, payments or credit limit."

Once the terms are established, make them work for you. Though the credit card company decides the due date, you can request to change the payment deadline to a time that's more convenient - at the beginning of the month, for example, if you have more cash on hand then.

Then set up online bill pay so your payment gets posted to your account immediately. 

NEW YORK (CNNMoney.com) -- The following minutes from the Federal Reserve's Federal Open Market Committee on April 29-30, 2008 were published on the Federal Reserve web site on May 21, 2008.

The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions.

By unanimous vote, the Committee extended for one year beginning in mid-December 2008 the reciprocal currency ("swap") arrangements with the Bank of Canada and the Banco de Mexico. The arrangement with the Bank of Canada is in the amount of $2 billion equivalent and that with the Banco de Mexico is in the amount of $3 billion equivalent. Both arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. The vote to renew the System's participation in the swap arrangements maturing in December was taken at this meeting because of the provision that each party must provide six months' prior notice of an intention to terminate its participation.

In view of continuing strains in interbank and other financial markets, the Committee took up proposals to expand several of the liquidity arrangements that had been put in place in recent months. Chairman Bernanke indicated his intention to increase the overall size of the Term Auction Facility under delegated authority from the Board of Governors, and he proposed increases in the swap lines with the European Central Bank and Swiss National Bank to help address pressures in short-term dollar funding markets. Meeting participants discussed the possible costs and benefits of a proposed broadening of eligible collateral for the Term Securities Lending Facility (TSLF). On balance, the Committee agreed that expanding the range of eligible collateral for the TSLF might help to increase the effectiveness of the facility and so further promote the orderly functioning of financial markets.

By unanimous votes, the Committee approved the following three resolutions:

The Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the European Central Bank to an amount not to exceed $50 billion. Within that aggregate limit, draws of up to $25 billion are hereby authorized. The current swap arrangement shall be extended until January 30, 2009, unless further extended by the Federal Open Market Committee.

The Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the Swiss National Bank to an amount not to exceed $12 billion. Within that aggregate limit, draws of up to $6 billion are hereby authorized. The current swap arrangement shall be extended until January 30, 2009, unless further extended by the Federal Open Market Committee.

In connection with the Term Securities Lending Facility, the Federal Reserve Bank of New York may accept pledges of AAA-rated asset-backed securities (in addition to the other assets previously authorized by the FOMC) as collateral against loans of U.S. Government securities.

The information reviewed at the April meeting, which included the advance data on the national income and product accounts for the first quarter, indicated that economic growth had remained weak so far this year. Labor market conditions had deteriorated further, and manufacturing activity was soft. Housing activity had continued its sharp descent, and business spending on both structures and equipment had turned down. Consumer spending had grown very slowly, and household sentiment had tumbled further. Core consumer price inflation had slowed in recent months, but overall inflation remained elevated.

Labor demand continued to weaken in March. Private payroll employment fell in March at a rate similar to that in January and February. The reduction in jobs was again widespread, with losses registered at firms in the construction, manufacturing, and professional and business services sectors. Employment at firms in the nonbusiness services sector, which includes health care, continued to rise. Aggregate hours of private production or nonsupervisory workers moved up in March but posted a decline for the first quarter as a whole after having contracted slightly in the first two months of the year. The unemployment rate rose to 5.1 percent in March, significantly above its level a year ago, and the labor force participation rate was little changed.

Although industrial production rose in March, production over the first quarter as a whole was soft, having declined, on average, in January and February. Gains in manufacturing output of consumer and high-tech goods in March were partially offset by a sharp drop in production of motor vehicles and parts and by ongoing weakness in the output of construction-related industries. The output of utilities rebounded in March following a weather-related drop in February, and mining output moved up after exhibiting weakness earlier in the year. The factory utilization rate edged up in March but stayed well below its recent high in the third quarter of 2007.

Real consumer spending expanded slowly in the first quarter. Real outlays on durable goods, including automobiles, were estimated to have declined in March, but expenditures on nondurable goods were thought to have edged up, boosted by a sizable increase in real outlays for gasoline. For the quarter as a whole, however, real expenditures on both durable and nondurable goods declined. Real disposable personal income also grew slowly in the first quarter, restrained by rapidly rising prices for energy and food. The ratio of household wealth to disposable income appeared to have moved down again in the first quarter, damped by the appreciable net decline in broad equity prices over that period and by further reductions in house prices. Measures of consumer sentiment fell sharply in March and April; the April reading of consumer sentiment published in the Reuters/University of Michigan Survey of Consumers was near the low levels posted in the early 1990s.

Residential construction continued its rapid contraction in the first quarter. Single-family housing starts maintained their steep downward trajectory in March, and starts of multifamily homes declined to the lower portion of their recent range. Sales of new single-family homes declined in February to a very low rate and dropped further in March. Even though production cuts by homebuilders helped to reduce the level of inventories at the end of February, the slow pace of sales caused the ratio of unsold new homes to sales to increase further. Sales of existing homes remained weak, on average, in February and March, and the index of pending sales agreements in February suggested continued sluggish activity in coming months. The recent softening in residential housing demand was consistent with reports of tighter credit conditions for both prime and nonprime borrowers.

In the business sector, real spending on equipment and software contracted slightly in the first quarter after having posted a small increase in the fourth quarter. Following declines in both shipments and orders of nondefense capital goods excluding aircraft in January and February, shipments increased in March, but orders were flat. The deteriorating outlook for sales, reduced credit availability, and downbeat readings on business sentiment all pointed to further weakness in capital spending in the near term. Real outlays for nonresidential structures also were estimated to have declined in the first quarter. Indicators suggested that the demand for commercial properties had fallen off substantially from record levels last year, and commercial property prices appeared to be decelerating. Reduced credit availability and less-favorable lending terms had apparently weighed on activity in this sector.

Real investment in nonfarm inventories excluding motor vehicles was estimated to have bounced back to a moderate annual rate in the first quarter, but motor vehicle inventories continued to fall. Some of the drop in motor vehicle stocks was a result of the disruption to production from a labor dispute. The ratio of book-value inventories to sales in the manufacturing and trade sector (excluding motor vehicles) moved up a little, on average, in January and February. Still, outside of categories tied to housing and construction, firms did not appear to be burdened with excess stocks.

The U.S. international trade deficit widened in February. Imports rose sharply, more than offsetting continued robust growth of exports. Most major categories of non-oil imports increased in February, and imports of natural gas, automobiles, and consumer goods surged. Imports of services continued to rise at a robust pace. By contrast, oil imports moved down. Increases in exports in February were concentrated in agricultural goods, automobiles, and industrial supplies, particularly fuels. Exports of capital goods declined for the second consecutive month, with weakness evident across a wide range of products.

Real economic growth in the major advanced foreign economies was estimated to have slowed further in the first quarter and consumer and business sentiment was generally down. In Japan, business sentiment fell significantly and indicators of investment remained weak. In the euro area, growth was estimated to have remained subdued in the first quarter, with Germany and France faring better than Italy and Spain. Growth in the United Kingdom slowed in the first quarter, as credit conditions tightened. Available data for Canada indicated a continued substantial drag from exports in the first quarter, although domestic demand appeared relatively robust. In emerging market economies, economic growth slowed some in the fourth quarter and was estimated to have held about steady in the first quarter. In emerging Asia, real economic growth was estimated to have picked up in the first quarter from a robust pace in the fourth quarter, led by brisk expansions in China and Singapore. Growth in other emerging Asian economies generally remained subdued. The pace of expansion in Latin America likely declined some in the first quarter, largely because the Mexican economy slowed in the wake of softer growth in the United States.

Headline inflation in the United States was elevated in March. Although the increase in food prices slowed in March relative to earlier in the year, energy prices rose sharply. Excluding these categories, core inflation rose at a relatively subdued rate again in March. The core personal consumption expenditures (PCE) price index increased at a somewhat more moderate rate in the first quarter than in the fourth quarter of 2007. Survey measures of households' expectations for year-ahead inflation rose further in early April, but survey measures of longer-term inflation expectations moved relatively little. Average hourly earnings increased in March at a somewhat slower pace than in January and February. This wage measure rose significantly less over the 12 months that ended in March than in the previous 12 months. The employment cost index for hourly compensation continued to rise at a moderate rate in the first quarter.

At its March 18 meeting, the Federal Open Market Committee (FOMC) lowered its target for the federal funds rate 75 basis points, to 2-1/4 percent. In addition, the Board of Governors approved a decrease of 75 basis points in the discount rate, to 2-1/2 percent. The Committee's statement noted that recent information indicated that the outlook for economic activity had weakened further; growth in consumer spending had slowed, and labor markets had softened. It also indicated that financial markets remained under considerable stress, and that the tightening of credit conditions and the deepening of the housing contraction were likely to weigh on economic growth over the next few quarters. Inflation had been elevated, and some indicators of inflation expectations had risen, but the Committee expected inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, the Committee noted that uncertainty about the inflation outlook had increased, and that it would be necessary to continue to monitor inflation developments carefully. The Committee said that its action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. The Committee noted, however, that downside risks to growth remained, and indicated that it would act in a timely manner as needed to promote sustainable economic growth and price stability.

Conditions in U.S. financial markets improved somewhat, on balance, over the intermeeting period, but strains in some short-term funding markets increased. Pressures on bank balance sheets and capital positions appeared to mount further, reflecting additional losses on asset-backed securities and on business and household loans. Against this backdrop, term spreads in interbank funding markets and spreads on commercial paper issued by financial institutions widened significantly. Financial institutions continued to tap the Federal Reserve's credit programs. Primary credit borrowing picked up noticeably after March 16, when the Federal Reserve reduced the spread between the primary credit rate and the target federal funds rate to 25 basis points. Demand for funds from the Term Auction Facility stayed high over the period. In addition, the Primary Dealer Credit Facility drew substantial demand through late March, although the amount outstanding subsequently declined somewhat. Early in the period, historically low interest rates on Treasury bills and on general-collateral Treasury repurchase agreements indicated a considerable demand for safe-haven assets. However, Federal Reserve actions that increased the availability of Treasury securities to the public apparently helped to improve conditions in those markets. In five weekly auctions beginning on March 27, the Term Securities Lending Facility provided a substantial volume of Treasury securities in exchange for less-liquid assets. Yields on short-term Treasury securities and Treasury repurchase agreements moved higher, on balance, following these auctions; nonetheless, "haircuts" applied by lenders on non-Treasury collateral remained elevated, and in some cases increased somewhat, toward the end of the period.

In longer-term credit markets, yields on investment-grade corporate bonds rose, but their spreads relative to Treasury securities decreased a bit from recent multiyear highs. In contrast, yields on speculative-grade issues dropped, and their spreads relative to Treasury yields narrowed significantly. Gross bond issuance by nonfinancial firms was robust in March and the first half of April and included a small amount of issuance by speculative-grade firms. Supported by increases in business and residential real estate loans, commercial bank credit expanded briskly in March despite the report of tighter lending conditions in the Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April. Part of the strength in commercial and industrial loans was apparently due to increased utilization of existing credit lines, the pricing of which reflects changes in lending policies only with a lag. Some banks surveyed in April reported that they had started to take actions to limit their exposure to home equity lines of credit, draws on which had grown rapidly in recent months. After having tightened considerably in March, conditions in the conforming segment of the residential mortgage market recovered somewhat. Spreads of rates on conforming residential mortgages over those on comparable-maturity Treasury securities decreased, and credit default swap premiums for the government-sponsored enterprises declined substantially. Broad stock price indexes increased markedly over the intermeeting period, mainly in response to earnings reports and announcements of recapitalizations from major financial institutions that evidently lessened investors' concerns about the possibility of severe difficulties materializing at those firms.

Conditions in the money markets of major foreign economies remained strained, particularly in the United Kingdom and the euro area. Term interbank funding spreads rose in these areas, despite steps taken by their central banks to help ease liquidity pressures. Yields on sovereign debt in the advanced foreign economies moved up in a range that was about in line with the increases in comparable Treasury yields in the United States. The trade-weighted foreign exchange value of the dollar against major currencies rose.

M2 expanded briskly again in March, as households continued to seek the relative liquidity and safety of liquid deposits and retail money market mutual funds. The increases in these components were also supported by declines in opportunity costs stemming from monetary policy easing.

Over the intermeeting period, the expected path of monetary policy over the next year as measured by money market futures rates moved up significantly on net, apparently because economic data releases and announcements by large financial firms imparted greater confidence among investors about the prospects for the economy's performance in coming quarters. Futures rates also moved up in response to both the Committee's decision to lower the target for the federal funds rate by 75 basis points at the March 18 meeting, which was a somewhat smaller reduction than market participants had expected, and the Committee's accompanying statement, which reportedly conveyed more concern about inflation than had been anticipated. The subsequent release of the minutes of the March FOMC meeting elicited limited reaction. Consistent with the higher expected path for policy and easing of safe-haven demands, yields on nominal Treasury coupon securities rose substantially over the period, and the Treasury yield curve flattened. Measures of inflation compensation for the next five years derived from yields on inflation-indexed Treasury securities were quite volatile around the time of the March FOMC meeting and on balance increased somewhat over the intermeeting period, although they remained in the lower portion of their range over the past several months. Measures of longer-term inflation compensation declined, returning to around the middle of their recent elevated range.

In the forecast prepared for this meeting, the staff made little change to its projection for the growth of real gross domestic product (GDP) in 2008 and 2009. The available indicators of recent economic activity had come in close to the staff's expectations and had continued to suggest that a substantial softening in economic activity was under way. The staff projection pointed to a contraction of real GDP in the first half of 2008 followed by a modest rise in the second half of this year, aided in part by the fiscal stimulus package. The forecast showed real GDP expanding at a rate somewhat above its potential in 2009, reflecting the impetus from cumulative monetary policy easing, continued strength in net exports, a gradual lessening in financial market strains, and the waning drag from past increases in energy prices. Despite this pickup in the pace of activity, the trajectory of resource utilization anticipated through 2009 implied noticeable slack. The projection for core PCE price inflation in 2008 as a whole was unchanged; it was reduced a bit over the first half of the year to reflect the somewhat lower-than-expected readings of recent core PCE inflation and raised a bit over the second half of the year to incorporate the spillover from larger-than-anticipated increases in prices of crude oil and non-oil imports since the previous FOMC meeting. The forecast of headline PCE inflation in 2008 was revised up in light of the further run-up in energy prices and somewhat higher food price inflation; headline PCE inflation was expected to exceed core PCE price inflation by a considerable margin this year. In view of the projected slack in resource utilization in 2009 and flattening out of oil and other commodity prices, both core and headline PCE price inflation were projected to drop back from their 2008 levels, in line with the staff's previous forecasts.

In conjunction with the FOMC meeting in April, all meeting participants (Federal Reserve Board members and Reserve Bank presidents) provided annual projections for economic growth, the unemployment rate, and inflation for the period 2008 through 2010. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.

In their discussion of the economic situation and outlook, FOMC participants noted that the data received since the March FOMC meeting, while pointing to continued weakness in economic activity, had been broadly consistent with their expectations. Conditions across a number of financial markets were judged to have improved over the intermeeting period, but financial markets remained fragile and strains in some markets had intensified. Although participants anticipated that further improvement in market conditions would occur only slowly and that some backsliding was possible, 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. Economic activity was anticipated to be weakest over the next few months, with many participants judging that real GDP was likely to contract slightly in the first half of 2008. GDP growth was expected to begin to recover in the second half of this year, supported by accommodative monetary policy and fiscal stimulus, and to increase further in 2009 and 2010. Views varied about the likely pace and vigor of the recovery through 2009, although all participants projected GDP growth to be at or above trend in 2010. Incoming information on the inflation outlook since the March FOMC meeting had been mixed. Readings on core inflation had improved somewhat, but some of this improvement was thought likely to reflect transitory factors, and energy and other commodity prices had increased further since March. Total PCE inflation was projected to moderate from its current elevated level to between 1-1/2 percent and 2 percent in 2010, although participants stressed that this expected moderation was dependent on food and energy prices flattening out and critically on inflation expectations remaining reasonably well anchored.

Conditions across a number of financial markets had improved since the previous FOMC meeting. Equity prices and yields on Treasury securities had increased, volatility in both equity and debt markets had ebbed somewhat, and a range of credit risk premiums had moved down. Participants noted that the better tone of financial markets had been helped by the apparent willingness and ability of financial institutions to raise new capital. Investors' confidence had probably also been buoyed by corporate earnings reports for the first quarter, which suggested that profit growth outside of the financial sector remained solid, and also by the resolution of the difficulties of a major broker-dealer in mid-March. Moreover, the various liquidity facilities introduced by the Federal Reserve in recent months were thought to have bolstered market liquidity and aided a return to more orderly market functioning. But participants emphasized that financial markets remained under considerable stress, noted that the functioning of many markets remained impaired, and expressed concern that some of the recent recovery in markets could prove fragile. Strains in short-term funding markets had intensified over the intermeeting period, in part reflecting continuing pressures on the liquidity positions of financial institutions. Despite a narrowing of spreads on corporate bonds, credit conditions were seen as remaining tight. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April indicated that banks had tightened lending standards and pricing terms on loans to both businesses and households. Participants stressed that it could take some time for the financial system to return to a more normal footing, and a number of participants were of the view that financial headwinds would probably continue to restrain economic activity through much of next year. Even so, the likelihood that the functioning of the financial system would deteriorate substantially further with significant adverse implications for the economic outlook was judged by participants to have receded somewhat since the March FOMC meeting.

The housing market had continued to weaken since the previous meeting, and participants saw little indication of a bottoming out in either housing activity or prices. Housing starts and the demand for new homes had declined further, house prices in many parts of the country were falling faster than they had towards the end of 2007, and inventories of unsold homes remained quite elevated. A small number of participants reported tentative signs that housing activity in a few areas of the country might be beginning to pick up, and a narrowing of credit risk spreads on AAA indexes of sub-prime mortgages in recent weeks was also noted. Nonetheless, the outlook for the housing market remained bleak, with housing demand likely to be affected by restrictive conditions in mortgage markets, fears that house prices would fall further, and weakening labor markets. The possibility that house prices could decline by more than anticipated, and that the effects of such a decline could be amplified through their impact on financial institutions and financial markets, remained a key source of downside risk to participants' projections for economic growth.

Growth in consumer spending appeared to have slowed to a crawl in recent months and consumer sentiment had fallen sharply. The pressure on households' real incomes from higher energy prices and the erosion of wealth resulting from continuing declines in house prices likely contributed to the deceleration in consumer outlays. Reports from contacts in the banking and financial services sectors indicated that the availability of both consumer credit and home equity lines had tightened considerably further in recent months and that delinquency rates on household credit had continued to drift upwards. Consumer sentiment and spending had also been held down by the softening in labor markets--nonfarm payroll employment had fallen for the third consecutive month in March and the unemployment rate had moved up. The restraint on spending emanating from weakness in labor markets was expected to increase over coming quarters, with participants projecting the unemployment rate to pick up further this year and to remain elevated in 2009.

Consumption spending was likely to be supported in the near term by the fiscal stimulus package, which was expected to boost spending temporarily in the middle of this year. Some participants suggested that the weak economic environment could increase the propensity of households to use their tax rebates to pay down existing debt and so might diminish the impact of the package. However, it was also noted that the tightening in credit availability might mean a significant number of households may be credit constrained and this might increase the proportion of the rebates that is spent. The timing and magnitude of the impact of the stimulus package on GDP was also seen as depending on the extent to which the boost to consumption spending is absorbed by a temporary run-down in firms' inventories or by an increase in imports rather than by an expansion in domestic output.

The outlook for business spending remained decidedly downbeat. Indicators of business sentiment were low, and reports from business contacts suggested that firms were scaling back their capital spending plans. Several participants reported that uncertainty about the economic outlook was leading firms to defer spending projects until prospects for economic activity became clearer. The tightening in the supply of business credit was also seen as holding back investment, with some firms apparently reluctant to reduce their liquidity positions in the current environment. Spending on nonresidential construction projects continued to slow, although the extent of that slowing varied across the country. A few participants reported that the commercial real estate market in some areas remained relatively firm, supported by low vacancy rates.

The strength of U.S. exports remained a notable bright spot. Growth in exports, which had been supported by solid advances in foreign economies and by declines in the foreign exchange value of the dollar, had partially insulated the output and profits of U.S. companies, especially those in the manufacturing sector, from the effects of weakening domestic demand. Several participants voiced concern, however, that the pace of activity in the rest of the world could slow in coming quarters, suggesting that the impetus provided from net exports might well diminish.

The information received on the inflation outlook since the March FOMC meeting had been mixed. Recent readings on core inflation had improved somewhat, although participants noted that some of that improvement probably reflected transitory factors. Moreover, the increase in crude oil prices to record levels, together with rapid increases in food and import prices in recent months, was likely to put upward pressure on inflation over the next few quarters. Prices embedded in futures contracts continued to point to a leveling-off of energy and commodity prices. Although these futures contracts probably remained the best basis for projecting movements in commodity prices, participants emphasized the considerable uncertainty attending the likely path of commodity prices and cautioned that commodity prices in recent years had often advanced more quickly than had been implied by futures contracts. Several participants reported that business contacts had expressed growing concerns about the increase in their input costs and that there were signs that an increasing number of firms were seeking to pass on these higher costs to their customers in the form of higher prices. Other participants noted, however, that the extent of the pass-through of higher energy and food prices to core retail prices appeared relatively limited to date, and that profit margins in the nonfinancial sector remained reasonably high, suggesting that there was some scope for firms to absorb cost increases without raising prices. Available data and anecdotal reports indicated that gains in labor compensation remained moderate, and some participants suggested that wage growth was unlikely to pick up sharply in coming quarters if, as anticipated, labor markets remained relatively soft. However, several participants were of the view that wage inflation tended to lag increases in prices and so may not provide a useful guide to emerging price pressures.

On balance, participants expected the recent increases in oil and food prices to continue to boost overall consumer price inflation in the near term; thereafter, total inflation was projected to moderate, with all participants expecting total PCE inflation of between 1-1/2 percent and 2 percent by 2010. Participants stressed that the expected moderation in inflation was dependent on the continued stability of inflation expectations. A number of participants voiced concern that long-term inflation expectations could drift upwards if headline inflation remained elevated for a protracted period or if the recent substantial policy easing was misinterpreted by the public as suggesting that Committee members had a greater tolerance for inflation than previously thought. The possibility that inflation expectations could increase was viewed as a key upside risk to the inflation outlook. However, participants emphasized that appropriate monetary policy, combined with effective communication of the Committee's commitment to price stability, would mitigate this risk. Participants stressed the difficulty of gauging the appropriate stance of policy in current circumstances. Some participants noted that the level of the federal funds target, especially when compared with the current rate of inflation, was relatively low by historical standards. Even taking account of current financial headwinds, such a low rate could suggest that policy was reasonably accommodative. However, other participants observed that the pronounced strains in banking and financial markets imparted much greater uncertainty to such assessments and meant that measures of the stance of policy based on the real federal funds rate were not likely to provide a reliable guide in the current environment. Several participants expressed the view that the easing in monetary policy since last fall had not as yet led to a loosening in overall financial conditions, but rather had prevented financial conditions from tightening as much as they otherwise would have in response to escalating strains in financial markets. This view suggested that the stimulus from past monetary policy easing would be felt mainly as conditions in financial markets improved.

In the Committee's discussion of monetary policy for the intermeeeting period, most members judged that policy should be eased by 25 basis points at this meeting. Although prospects for economic activity had not deteriorated significantly since the March meeting, the outlook for growth and employment remained weak and slack in resource utilization was likely to increase. An additional easing in policy would help to foster moderate growth over time without impeding a moderation in inflation. Moreover, although the likelihood that economic activity would be severely disrupted by a sharp deterioration in financial markets had apparently receded, most members thought that the risks to economic growth were still skewed to the downside. A reduction in interest rates would help to mitigate those risks. However, most members viewed the decision to reduce interest rates at this meeting as a close call. The substantial easing of monetary policy since last September, the ongoing steps taken by the Federal Reserve to provide liquidity and support market functioning, and the imminent fiscal stimulus would help to support economic activity. Moreover, 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 and the fact that some indicators suggested that inflation expectations had risen in recent months. Nonetheless, most members agreed that a further, modest easing in the stance of policy was appropriate to balance better the risks to achieving the Committee's dual objectives of maximum employment and price stability over the medium run.

The Committee agreed that that the statement to be released after the meeting should take note of the substantial policy easing to date and the ongoing measures to foster market liquidity. In light of these significant policy actions, the risks to growth were now thought to be more closely balanced by the risks to inflation. Accordingly, the Committee felt that it was no longer appropriate for the statement to emphasize the downside risks to growth. Given these circumstances, future policy adjustments would depend on the extent to which economic and financial developments affected the medium-term outlook for growth and inflation. In that regard, 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, unless economic and financial developments indicated a significant weakening of the economic outlook.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

"The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 2 percent."

The vote encompassed approval of the statement below to be released at 2:15 p.m.:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Votes for this action: Messrs. Bernanke, Geithner, Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Stern and Warsh.

Votes against this action: Messrs. Fisher and Plosser.

Messrs. Fisher and Plosser dissented because they preferred no change in the target federal funds rate at this meeting. Although the economy had been weak, it had evolved roughly as expected since the previous meeting. Stresses in financial markets also had continued, but the Federal Reserve's liquidity facilities were helpful in that regard and the more worrisome development in their view was the outlook for inflation. Rising prices for food, energy, and other commodities; signs of higher inflation expectations; and a negative real federal funds rate raised substantial concerns about the prospects for inflation. Mr. Plosser cited the recent rapid growth of monetary aggregates as additional evidence that the economy had ample liquidity after the aggressive easing of policy to date. Mr. Fisher was concerned that an adverse feedback loop was developing by which lowering the funds rate had been pushing down the exchange value of the dollar, contributing to higher commodity and import prices, cutting real spending by businesses and households, and therefore ultimately impairing economic activity. To help prevent inflation expectations from becoming unhinged, both Messrs. Fisher and Plosser felt the Committee should put additional emphasis on its price stability goal at this point, and they believed that another reduction in the funds rate at this meeting could prove costly over the longer run.

In a joint session of the Federal Open Market Committee and the Board of Governors, meeting participants turned to a discussion of the implications of the payment of interest on reserves for monetary policy implementation. Following passage of the Financial Services Regulatory Relief Act of 2006, which will permit the Federal Reserve to reduce reserve requirements and to pay interest on reserves beginning in 2011, the staff had undertaken work to explore and evaluate alternative approaches to monetary policy implementation using these new authorities. After a staff presentation summarizing the work to date, policymakers discussed the potential advantages and disadvantages of several of the alternative approaches. Considerations included reducing the burden and complexity associated with the current system of reserve requirements and ensuring that the Committee's interest rate targets could be reliably achieved. Participants noted that frameworks for monetary policy implementation employed in other countries span a wide range and that the experiences of these countries provided useful information for the Federal Reserve's consideration of alternative approaches. They agreed that further study was required to narrow the range of options under consideration and that it would be important to consult closely with depository institutions and others in the design of a new system.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 24-25, 2008.

The meeting adjourned at 1:00 p.m. 

NEW YORK (CNNMoney.com) -- The Federal Reserve sees worse economic problems ahead, according to new forecasts from the central bank released Wednesday.

But even so, the Fed may be reluctant to cut interest rates any further than it already has, the minutes from its last meeting show. (The minutes were also released Wednesday.)

The Fed lowered its economic growth forecast for the year. At the same time, it raised its projections for inflation and unemployment. The combination of slowing growth and rising prices created a difficult situation that made the Fed's latest decision to cut rates on April 30 a "close call."

Stocks, which were trading a bit lower before the release of the minutes, fell even further after the new forecast was revealed. The Dow finished the day with a more than 220 point loss.

The central bank said it now believes full-year economic growth will be between 0.3% and 1.2% this year, significantly below its previous forecast of 1.3% to 2% growth in January.

The Fed said in its minutes that members now expect the economy to shrink in the first half of the year -- the clearest signal yet that Federal Reserve chairman Ben Bernanke and other bankers believe the economy is in a recession.

But some policymakers argued the Fed has cut rates enough already and that the central banks should not lower rates further unless there is evidence of "significant weakening."

The Fed also raised its unemployment forecast for the year to between 5.5% and 5.7%, up from its earlier estimate of 5.2% to 5.5%. The unemployment rate was 5% in April.

In addition, the Fed boosted its projection for inflation. It said it now expects personal consumption expenditures to rise between 3.1% and 3.4% in 2008, a full percentage point more than its earlier expectation.

Even when soaring food and energy prices are stripped out, the Fed expects steeper "core" inflation than its previous estimate.

The Fed cut its federal funds rate, a key short-term rate, by a quarter- percentage point at the end of its last meeting on April 30. According to the minutes, that decision was viewed as a "close call" partly because of rising inflation pressures.

"I think they are stating more clearly that we are in a recession, but the main thing to take away from this is that they're not going to cut any further," said Gus Faucher, director of macroeconomics for Moody's Economy.com.

The Fed' indicated it is expecting a pickup in economic growth in the second half of this year, as the effect of its previous rate cuts and tax rebates to consumers start to impact the economy.

But while it said it expects the economy to recover a bit next year -- forecasts call for growth of 2% to 2.8% in 2009 -- the Fed still sees some weakness lingering into next year.

The central bank now thinks the unemployment rate in 2009 will be between 5.2% and 5.7%, up from an earlier projection of 5% to 5.3%. The Fed said it expects to see "noticeable slack" in the economy next year.

"They're not looking for a deep recession. But they're not expecting a heck of a lot of rebound," said David Wyss, chief economist with Standard & Poor's.

He added that the latest forecast is simply catching up with the consensus view among economists that the nation has already fallen into recession. He warned that the Fed's outlook may deteriorate even further in light of the spike in oil prices in just the past few days.

"Remember, this is their thinking of three weeks ago," Wyss said. "They might have even a different view on inflation and GDP today."

In an effort to keep the country from falling into recession and to deal with the credit crisis, the Fed has cut its key federal funds rate seven times since September. This short-term interest rate is now 2%, down from 5.25% at the start of the Fed's easing campaign,

The federal funds rate is a benchmark for home equity lines of credit, credit cards and other consumer loans as well as the prime rate used for short-term business loans.

Keith Hembre, chief economist at First American Funds, said that it makes sense that the Fed is now paying more attention to inflation pressures.

Some believe the Fed cuts since last September helped fuel inflation, especially the sharp run-up in oil prices, because the rate cuts have led to a weakening of the dollar.

Along those lines, the two Fed members who voted against the last rate cut -- argued during the meeting that the Fed cuts were hurting the economy more than helping it.

Dallas Federal Reserve president Richard Fisher and Philadelphia Federal Reserve president Charles Plosser both contended that the rate cuts have fed inflation and cut into spending by consumers and businesses.

"They believed that another reduction in the funds rate at this meeting could prove costly over the longer run," the Fed said in the minutes.

So Hembre thinks the Fed wants to send the clear signal that it is on hold on interest rates for the foreseeable future.

"They don't want to exacerbate it by the expectation of further rate cuts," he said.