FOMC Minutes Raises the Specter for Further Economic Weakness

The Fed on Wednesday released ‘Minutes‘ of the Committee meeting held late October, ’08, raising the specter for more economic and financial weakness. The projections ahead suggest a prolonged and severe economic downturn with increased worries of a deep recession.

Fed officials noted in their analysis that a number of adverse financial developments continue to negatively influence economic and financial market conditions. The conclusion was based on the evidence that the financial turmoil has increasingly become an international phenomenon, leading to a noticeable deterioration in global growth prospects.

FOMC said it viewed the outlook for economic growth and employment as having worsened significantly and expected that real GDP growth would remain ‘very’ weak next year and that the subsequent pace of recovery would be quite slow. Official’s projections for real GDP growth in fiscal ’08 had a tendency of 0 to 0.3% compared with that of 1 to 1.6% made last June, 2.3 to 3.2% for 2010, and 2.8 to 3.6% for 2011.

They also anticipated that the unemployment rate would increase substantially further over the coming year with rate projections of 7.1 to 7.6% for 2009, 6.5 to 7.3% for 2010, and 5.5 to 6.6% for 2011. The inflation on the other hand was expected to drop markedly in coming quarters as a result of the recent sharp declines in the prices of energy and other commodities, and the widening slack in resource utilization. The central tendency of participants’ projections for total PCE inflation, the FOMC’s Oct. 28-29 meeting minutes said – was 1.3 to 2% for 2009, 1.4 to 1.8% for 2010, and 1.4 to 1.7% for 2011.

Fed officials did emphasize the considerable degree of uncertainty about the future course of the financial crisis and its impact on the real economy, which suggests they stood ready to slash interest rates. However, several participants noted that further monetary policy easing could become constrained by the lower bound of zero on nominal interest rates. But, the committee agreed that it would take whatever steps were necessary to support the recovery of the economy.

The FOMC voted unanimously Oct. 29 to lower federal-funds rate by 0.5 percentage point to 1%, its lowest level since the period between June ’03 and June ’04.

As a side note: Based on ‘minutes’ release by FOMC, many are insinuating a depression scenario similar to that of 1929. While it is impossible to know how the current economic downturn will evolve from this point forward, we should keep in mind several facts. During the Great Depression, labor market conditions deteriorated with unemployment reaching 25% (6.5% present) while wages fell by more than 40% (on a YoY basis, real average weekly earnings rose 1.4% in Oct, seasonally adjusted). At the same time, the economic downturn was mostly aggravated by extremely poor monetary policy. The Fed during that period allowed the money supply to fall 30%. Currently that is not the case. Also, in 1930 we had a negative GDP growth rate of (8.6%) compared with a fractional (0.3%) annual rate in Q3’08. Having said that, one thing is quite clear ; our economy currently resembles a rock balanced at the top of a cliff.

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