Another surge in world oil prices to beyond $US133 a barrel has strengthened the case put in the latest economic forecast by the Federal Reserve: that the US is in recession.

The price of oil has hit record highs, peaking at $US134.15 before easing, rising more than 3% in the day’s trading and is now up around 17% in the past five days. News of record oil prices came on the same day that the Fed released the minutes from its meeting on the 29th and 30th of April.

The minutes record that Federal Reserve members now expect the US economy to shrink in the first half of the year — the clearest indication that the peak economic policymaking group believes the economy is in recession.

“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,” the minutes read.

The Fed forecast lower growth, higher unemployment and higher inflation for the rest of 2008 and into 2009.

It was confirmation of what should have been obvious to US markets, the Bush Administration and investors around the world for the past two months — since Bear Stearns was rescued — but the hype of a rebound in the economy was widely accepted. Inflation was dismissed as being either temporary or under control because core readings showed mild rises in prices. That was wrong.

The minutes confirmed that the Fed came close to not cutting rates by 0.25% on April 30, and will now certainly not cut again: the next move is a rate increase, if the way oil and food prices have pushed inflation higher. The Fed saw growth in the range from a tiny 0.3% to 1.2% in 2008, down from the 1.3% to 2% it estimated in January.

On this news, and surging oil prices, Wall Street fell again steeply with the slump now more than 3% in two days or over 425 points on the Dow, and similar falls for other indices. The euro was stronger, the US dollar weaker and the Aussie dollar hit a new 25 year high of 96.54 US cents in New York just after 4am, before easing a touch in local trading.