What do we have here, the Fed has lowered growth and inflation forecasts, Freddie Mac (a US based mortgage finance company – think subprime mortgages) suffered record losses, Citibank and Bank of America struggle with credit concerns, and the MIT real estate center recorded a fall in commercial property prices (and the first fall in commercial property values since 2003). On the back of this, the Fed feels the decision to cut rates again is on a knife-edge, with market sentiment pointing to a fall.
Markets are scared, there is no doubt. However, consumption activity has been strong, the low exchange rate will be a boon to the (minority) section of the economy that is involved in exports, and even with the Dow down towards 13000 household wealth is elevated. Furthermore, and most importantly, the labour market remains strong – people are still in jobs. Fed forecasts of 1.8% growth is not bad, given its during a downturn over 2008. It is also important to remember that these new forecasts are not as sudden and new as they seem – they were used as part of the previous cash rate review, before the September quarters strong GDP result. The only reason they have appeared now is because they were part of the minutes for the October cash rate review meeting.
All in all, the US economy might suffer a slowdown, but the situation is far from dire.
Update: The professor at Econbrowser gives a good summary of the Fed revisions. He manages to link the revisions to possible rate hikes, which I find interesting.