Fed sees malaise continuing

WASHINGTON — The country is stuck in a slow-growth rut, the Federal Reserve suggested Wednesday.

Higher prices for energy, food and other things are pinching people and businesses — reasons enough for the economy to be Americans' top concern heading into the presidential elections.

The Fed's report on business conditions around the nation provided fresh evidence of the toll that housing, credit and financial problems are taking on the economy as a whole.

With problems expected to persist into next year, the next president — be it John McCain or Barack Obama — is likely to face many challenges.

Heading into the fall, "economic activity has been slow" in most of the Fed's 12 regions, according to the report. Businesses described the climate as "weak," "soft" or "subdued."

A growing number of analysts think the economy could be thrown into a tailspin later this year and early next year as consumers and businesses curtail their spending even more.

"Over the course of this summer it became clear that the economic headwinds have not subsided as hoped," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech Wednesday.

"Most private forecasters are expecting significantly slowed growth in the second half of this year — as residential investment continues to be a drag on the economy, as consumers tighten up on their spending, as the impact of the federal tax rebate subsides, and as weakness among some of our major trading partners makes the outlook for many exports more restrained," he explained.

The Fed's report noted that consumers — major shapers of the economy — were cautious. Shoppers "concentrated on necessary items and retrenchment in discretionary spending," the Fed observed.

Caught between dueling concerns of slow growth and inflation, the Fed is expected to leave a key interest rate alone at 2 percent when it meets next, Sept. 16, and probably through the rest of this year.

"Given all the conflicting pressures, it does serve the Fed to just keep things steady on rates for now," said Brian Bethune, economist at Global Insight.