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US: FedWatch

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Fed economic outlook deteriorates further

Wed, Jan 7 2009, 08:26 GMT
by BBVA Bancomer Team

BBVA Bancomer

FOMC Minutes December 15-16, 2008

• The Comittee discussed extensively additional ways to stimulate the economy
• Fed economic outlook deteriorates further, while downside risks to inflation intensify

Participants agreed that economic conditions worsened considerably in the intermeeting period as “the adverse feedback loop between financial conditions and economic performance had intensified”. Members agreed that “the uncertainty surrounding the outlook was considerable and that downside risks to even this weak trajectory for economic activity were a serious concern”.

Moreover, “the severe ongoing financial market strains, the large reductions in household wealth, and the global nature of the economic slowdown were seen by some participants as suggesting the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome”. According to the staff forecast, “Real GDP was projected to decline for 2009 as a whole”, nonetheless, GDP is expected to “rise at a pace slightly above the rate of potential growth in 2010” as the financial turmoil begins to recede and the economy benefits from monetary and fiscal policy actions.

The staff also revised down its forecast for inflation due to increasing slack in labor and goods markets, lower import prices and diminishing pressures from energy and other commodity prices. Participants seemed worried from the recent sharp decline in the rate of inflation and were uncertain “about the extent to which inflation would fall. Some saw inflation leveling out near desired levels, while others expressed concern that inflation might decline below levels consistent with price stability in the medium term”.

Participants discussed extensively the benefits and costs of very low interest rates, advantages and disadvantages of quantitative targets, how best to use the Fed’s balance sheet and communication strategies. Members stressed the need to provide more information regarding future policy; particularly that rates were likely to stay exceptionally low for some time and explicitly conditioning future policy on the economic outlook. In addition, they discussed a more explicit indication on their long-term inflation prospect aimed at preventing inflation expectations from declining significantly.

The minutes reflect that members are worried on the inflation path and that despite the use of alternative policies, “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial”. Not surprisingly, FOMC announced that it stands ready to keep interest rates low for a prolonged period of time and that it will continue implementing nontraditional measures to boost economic activity.

• Download the full report

Published on  Wed, Jan 7 2009, 08:29 GMT