Feb. 18 (Bloomberg) -- Federal Reserve policy makers introduced a long-term U.S. inflation estimate, with most officials aiming to anchor public expectations at a 2 percent rate.

Officials also downgraded their forecasts for growth this year, seeing a deeper contraction as the credit crunch tightens, the Fed said in minutes of the Federal Open Market Committee meeting Jan. 27-28 released today in Washington. Some officials saw a risk of broad declines in prices, a pattern that could worsen the recession by making debts harder to repay.

The introduction of a long-term inflation goal helps bring the Fed closer to the central banks of the euro region, U.K. and other countries that set targets for price increases. The forecast contrasts with the warnings of some economists that record U.S. budget deficits and injections of liquidity by the Fed risk causing inflation to spiral in coming years.

“Increased clarity about the FOMC’s views regarding longer- term inflation should help to better stabilize the public’s inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low,” Chairman Ben S. Bernanke said today in a speech in Washington.

2009 Economy

Officials lowered their projections for economic growth this year, with most seeing a contraction of 0.5 percent to 1.3 percent.

“All but a few saw the risks to growth as tilted to the downside,” the minutes said. With financial markets strained, “they saw a significant risk that the economic recovery could be delayed and initially quite weak.”

The FOMC at its January meeting kept the benchmark interest rate at a range of zero to 0.25 percent, and reiterated its commitment to use its balance sheet to help thaw frozen credit markets.

While policy makers discussed the possibility of starting to buy longer-term Treasuries to help ease financial strains, most judged that the step “would only modestly improve conditions in private credit markets,” according to the minutes.

Bernanke floated the possibility of purchases of longer-term Treasuries in December. He didn’t mention the idea in today’s remarks. The FOMC concluded that existing plans to purchase debt issued or backed by government-chartered housing-finance companies, and to support securities backed by consumer loans, were “likely to be a more effective way” to use the Fed’s balance sheet, the minutes said.

Housing Pain

Fed policy makers warned that there was “no indication that the housing sector was beginning to stabilize” and a number of them worried last month that commercial real estate could “deteriorate sharply in the months ahead.”

A government report today underscored the continued rout in housing. Builders broke ground on the fewest new homes since Commerce Department records began in 1959. President Barack Obama unveiled a new effort to stem the industry’s slide, providing $75 billion for stemming mortgage foreclosures, and committing an extra $200 billion for Fannie Mae and Freddie Mac.

“It is going to be very hard to grow in 2009,” Dallas Fed President Richard Fisher said Feb. 9. “There is a paucity of confidence that takes a while to restore. It will take us a while to get out of this.”

Transparency Push

The introduction of longer-term forecasts is part of Bernanke’s campaign to make the U.S. central bank more transparent in its communication of policy. He said the projections would represent Fed board governors’ and district- bank presidents’ projections over a period of five to six years.

The Bank of England’s inflation target is 2 percent, while European Central Bank officials aim to keep the euro-region rate near, while less than, 2 percent.

A minority of U.S. central bankers estimated long-term inflation at 1.5 percent or 1.75 percent, according to the forecasts released alongside the FOMC minutes today. Policy makers estimated long-term economic growth at 2.5 percent to 2.7 percent and an unemployment rate at 4.8 percent to 5 percent.

Private forecasters have also cut their U.S. growth estimates. Gross domestic product will shrink at a 5 percent annual rate in the first three months of 2009, with a 1.7 percent contraction from April through June, according to a Bloomberg News survey of economists earlier this month. GDP declined last quarter at a 3.8 percent annual pace, the most since 1982.

Jobless Rate

Unemployment in the U.S. climbed in January to 7.6 percent, the highest level since 1992, and payrolls dropped 598,000.

The Washington-based Business Council, which includes the heads of Fortune 500 companies such as American Express Co., Procter & Gamble Co. and General Motors Corp., predicted Feb. 12 that the economy would contract at least 2.1 percent in the first half of the year and unemployment would rise to more than 8 percent.

“There is no quick end in sight,” JPMorgan Chase & Co. CEO Jamie Dimon said in a statement for the group.

Obama yesterday signed into law a $787 billion economic- stimulus package designed to counter the recession.

Fed officials “generally thought that fiscal stimulus was a necessary and important complement to the steps the Federal Reserve and other agencies were taking,” today’s minutes showed. Still, they concluded that the “magnitude” of the boost from tax cuts in the package was “far from clear.”

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

Last Updated: February 18, 2009 14:43 EST