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Fed Most Likely on Hold at October 30−31 FOMC Meeting

Wed, Oct 10 2007, 01:17 GMT
by Asha Bangalore

Northern Trust

The minutes of the September 18 FOMC meeting were significantly more bearish about the economy compared with the minutes of the August 7 FOMC meeting. Here are highlights of the minutes pertaining to revision of the staff forecast:

• The staff forecast for the fourth quarter of 2007 has been lowered because of the financial market turbulence.

• The minutes did not specify the magnitude of the mark down, but the forecast for 2008 is trimmed down.

• The forecast includes a modest increase in the unemployment rate. The official semi-annual forecast published in July showed a 4-3/4% unemployment rate as the central tendency compared with 4-1/2% -4-3/4% unemployment rate for 2007. The jobless rate in September was 4.7%.

• Residential investment expenditures are predicted to add to GDP only in the middle of 2008. In other words, declines in residential investment expenditures are expected in the second-half of 2007 and first-half of 2008.

• Businesses are predicted to “scale back capital spending.”

• Economy is expected to grow below potential in 2008. “GDP was projected to firm in 2009 to a pace bit above the rate of growth if its potential.”

• Core PCE inflation was trimmed down and headline PCE inflation was expected to slow in 2008 and 2009

The minutes indicated that the FOMC regards the “outlook for economic activity as characterized by particularly high uncertainty, with risks to growth skewed to the downside.” There were mixed opinions about how much the current financial shock will affect the economy. Financial conditions were seen as “still fragile and that further adverse credit market developments could well increase the downside risks to the economy.” Contrary to the staff forecast, members of the FOMC were more optimistic about business capital spending and expect investment to “remain healthy in coming quarters.” The FOMC has changed its view about inflation since the August meeting. It now sees the “inflation situation to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures has yet to be shown. But, they agreed that “some inflation risks remain.”

The minutes excluded any type of explicit guidance about the timing of the next federal funds rate cut. But, it was noted that “given the heightened uncertainty about the economic outlook, the Committee decided to refrain from providing an explicit assessment of the balance of risks, as such a characterization could give the mistaken impression that the Committee was more certain about the economic outlook than was in fact the case. Future actions would depend on how economic prospects were affected by evolving market developments and by other factors.”

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Published on  Wed, Oct 10 2007, 01:16 GMT