Highlights
The minutes of the FOMC meeting held on December 11 indicated that the FOMC members see the economy as unusually uncertain. Members viewed economic data since the October meeting as weaker than expected and resulted in a lowering of the Fed's forecast for economic growth. This and a reemergence of financial instability were the reasons for lowering the fed funds target rate by another 25 basis points. The FOMC was not more aggressive due to the belief that the prior 75 basis point reduction would continue to operate with a lag-with the full impact still to come. The FOCM participants saw headline inflation rising in the near-term due to higher food and energy costs. But with futures prices pointing toward lower oil costs and with resource utilization easing, inflation was expected to come down both at the headline and core levels.

The FOMC continued to debate the direction of interest rates going in both directions. First, the FOMC clearly saw greater downside risks and that monetary policy had become restrictive due to stress in the financial markets.

"In view of the further tightening of credit and deterioration of financial market conditions, the stance of monetary policy now appeared to be somewhat restrictive. Moreover, the downside risks to the expansion, resulting particularly from the weakening of the housing sector and the deterioration in credit market conditions, had risen."

However, committee members saw that credit problems as either worsening or possibly correcting faster than anticipated and result in the need to reverse some of the recent interest rate cuts.

"Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy. Members also recognized that financial market conditions might improve more rapidly than members expected, in which case a reversal of some of the rate cuts might become appropriate."

While economic data has been mixed, the key to near-term monetary policy appears to be when credit markets stabilize. For now, the Fed is erring on the side of caution to fix the credit markets and then worry about inflation. But the Fed has not forgotten that once the credit markets have stabilized, it may be time to make inflation fighting priority number one.

With today's weak ISM number, the markets will likely interpret the minutes to indicate that the Fed is still on track for another rate cut on January 30.

2008 Release Schedule

Released On: 1/2 2/20 4/8 5/21 7/16 8/26 10/7 11/19 Released For: Dec Jan Mar Apr Jun Aug Sep Oct