Federal Reserve officials ­on Wednesday slashed their forecasts for growth this year and raised projections for inflation as minutes revealed growing tension between the two objectives.

Most policymakers viewed the decision to cut interest rates last month as a “close call”, the minutes said.

Following the rate cut, the risks to growth “were now thought to be more closely balanced by the risks to inflation”.

The minutes suggested further rate reductions were unlikely unless the growth outlook deteriorates sharply, but that the Fed was also unlikely to raise rates again soon unless inflation expectations move higher.

The minutes revealed disagreement within the Fed as to the balance of risks and the appropriate stance of monetary policy.

Some Fed officials believed interest rates were “low” before the last rate cut given the relatively high rate of inflation. They felt policy was “accommodative” taking into account financial sector stress.

However, other officials argued that rate cuts “had not as yet led to a loosening in overall financial conditions” but had only offset the tightening in the credit markets that would otherwise have taken place.

The “central tendency” of policymakers’ forecasts was for growth of between 0.3 per cent and 1.2 per cent this year. Unemployment was forecast at 5.5-5.7 per cent.

However, policymakers also expect inflation of between 3.1 per cent and 3.4 per cent, with core inflation (excluding food and energy) also above the Fed’s implicit target of 2.2-2.4 per cent.

The Fed officials expect growth to rebound to about its trend rate and inflation to moderate next year. But the ugly mix of higher than normal unemployment and price increases is expected to persist through 2009.

Many Fed officials believe the US economy will have contracted in the first half of this year, before starting to recover in the second half.

They still think the risks to the growth forecast are to the downside but they think the improvement in financial markets has reduced the risk of a disastrous outcome.

“The likelihood that the financial system would deteriorate substantially further with significant adverse implications for the economic outlook was judged by participants to have receded somewhat,” the minutes said.

The big remaining threat to both the markets and the economy is from greater than expected declines in house prices, the policymakers believe. The outlook for housing was still “bleak”.

Fed officials are clearly edgy about inflation. The minutes show they saw the moderation in core inflation as encouraging but thought it was in part due to “transitory” factors.

Meanwhile, they judged that record oil prices were “likely to put upward pressure on inflation over the next few quarters”.

Some officials also “voiced concern that long-term inflation expectations could drift upwards if headline inflation remained elevated for a protracted period”.

There was disagreement over the risks to the base case forecast of high but moderating inflation. Some Fed officials believed the risks were to the upside – still higher inflation. Others argued the upside risk to prices was balanced by the downside risk to growth.