The Federal Reserve Board and the Federal Open Market Committee on Tuesday released ‘minutes’ of the Committee meeting held on December 15-16, 2008.
Based on reported developments in domestic financial markets and the information reviewed during the meeting, the Committee noted a significant contraction in economic activity in the fourth quarter.
According to the November employment report, conditions in the labor market deteriorated considerably in recent months with payroll employment falling at a rapid pace over the preceding three months. Most major industry groups including manufacturing, construction, retail, and financial activities shed a large number of jobs. The unemployment rate rose to 6.7%, while new claims for unemployment insurance rose sharply through early December. The Fed expects unemployment to rise “significantly” into 2010.
Industrial production also experienced a broad-based decline, falling markedly in November. The steep pace of deterioration in the production of consumer goods, notes the report, reflected cutbacks in motor vehicle assemblies as well as drops in the output of other goods, such as appliances, furniture, and products related to home improvement. For most major industry groups, factory utilization rates declined relative to their levels in July and remained below their long-run averages.
Consumer spending declined as well in nearly all broad spending categories over recent months. Sales of light motor vehicles, which slumped in October, fell further in November. However, preliminary data for October and November suggested that overall fourth-quarter real spending would receive a modest boost from recent price declines for gasoline. Real personal consumption expenditures [PCE] fell for the fifth straight month in October.
In the business sector, investment in equipment and software contracted at a faster rate in the fourth quarter than during the third quarter as demand seemed to be weighed down by weak fundamentals and increased uncertainty about the state of the economy.
Real construction activity continued to decline in November. Housing demand remained weak, and although the number of unsold new single-family homes continued to move lower, inventories remained elevated relative to the current pace of sales. Several indexes indicated that house prices continued to decline substantially while the market for nonconforming loans remained impaired.
On the inflation front ; headline consumer prices declined in recent months. Core PCE prices were unchanged in October, and based on the CPI, appeared to have been unchanged again in November. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010. The Committee noted that, in light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, it expected inflation to moderate in coming quarters to levels consistent with price stability.
In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP was projected to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten. All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year.
In addition to the already announced asset purchases and liquidity programs, members of the Committee agreed that the ‘minutes’ should indicate that it is the Committee’s intention to sustain the size of the Fed’s balance sheet at a high level through open market operations, and that the Committee stands ready to expand purchases of agency debt and agency mortgage-backed securities as it evaluates the potential benefits of purchasing longer-term Treasury securities.