Minutes of the October FOMC Meeting: Fed Remains Biased Toward Easing
The minutes of the October 30-31 meeting indicate a FOMC significantly concerned about the ramifications of the housing market weakness and the credit crunch. Despite this view, the October 31 easing was cited as a “close call.” The tone of the minutes suggests that the FOMC is predisposed toward easing but the timing remains unclear. The minutes noted that “even with some further easing of monetary policy participants expected economic growth to slow over the next few quarters, reflecting continued sharp declines in the housing sector and tightening standards and terms across a broad range of credit products.” At the same time “members felt that it was appropriate to underscore the upside risks of inflation stemming from the recent increases in the prices of energy and other commodities, even though recent readings on core inflation had been favorable.” The FOMC continues to see “the recent increases in the prices of energy and other commodities, along with the significant decline in the foreign exchange value of the dollar” as factors “that could exert pressure on prices of some core goods and services in the near term.” Moreover, the FOMC expressed that if overall inflation remained above core inflation for “a sustained period, then longer-term inflation expectations could move higher, a development that could lead to greater inflation pressures over the longer term and be costly to reverse.”
The Federal Reserve published its forecast of real GDP, inflation, and unemployment rate for 2007-2010, the first under the new procedure put in place to enhance transparency and improve communication. The highlights of the projections are in charts 1 and 2 and table 1. Essentially, the Fed sees slower growth in the early-part of 2008, a slightly higher unemployment rate in 2008, and moderation of both overall and core inflation.
The central tendency for real GDP growth in 2008 was revised down to 1.8% - 2.5% from 2-1/2% to 2-3/4% in June, implying a notably weak economy in the first-half of 2008. The weaker economic growth forecast is consistent with a slightly higher projection for the unemployment rate in the fourth quarter of 2008 (4.8% - 4.9% from the June forecast of 4-3/4%). Overall inflation was expected to move down over the forecast period, reflecting a flattening of energy prices. Based on the recent moderation in the core PCE, the projection for 2008 was revised down slightly to a 1.7%-1.9% gain from 1-3/4% to 2.0% increase predicted in June.
The risks attached to the forecast is the most important part of the new format given the emphasis the Fed has placed on the risk management approach of implementing monetary policy. It was noted that “most participants viewed the risks to their GDP projections as weighted to the downside and the associated risks to their projections of unemployment tilted to the upside.” It was also noted that “most participants judged that the uncertainty attending their projections for real GDP growth was above typical levels seen in the past. In contrast, the uncertainty attached to participants’ inflation projections was generally viewed as being broadly in line with past experience.” In the inflation–growth debate, the perception of these risks is key to the course of monetary policy in the near term. These comments strongly suggest that the FOMC remains biased toward easing.
October Housing Starts – Strength in Multi-family Units Boosts Total
Total housing starts rose 3.0% to an annual rate of 1.229 million units in October after an 11.4% drop in the prior month. The 44.4% jump in new construction of multi-family units gave the boost to the headline. Single-family starts fell 7.3% to an annual rate of 884,000, the lowest in 16 years.
On a regional basis, starts of new homes increased in the Northeast (+8.5%), Midwest (+21.1%), and West (+5.8%) but fell in the South (-4.6%). Permit extensions for the construction of new homes dropped 6.6% to an annual rate of 1.178 million units, while permits issued for single-family units decline 8.0% to 807,000 units, the lowest since November 1991 (see chart 4). The weakness in permits issued suggests that the outlook for the housing market remains grim. In related news, D.R. Horton, one of the largest home builders in the nation, reported a 48% cancellation rate in its fiscal fourth quarter, up 38% in the third quarter and 40% a year ago.
