Highlights
The latest FOMC minutes can best be described as the gloomiest in some time and placing the Fed squarely between a rock and a hard place. The Fed is still placing fighting recession as job number one but inflation is still a serious concern. Even though two voting members of the FOMC voting against lowering the fed funds target rate, some members saw the economy as possibly being headed toward a very contracted recession. Members noted elevated inflation pressures and sounded almost as if they are gambling that inflation will be easing as the economy slows.

"In the Committee's discussion of monetary policy for the intermeeting period, most members judged that a substantial easing in the stance of monetary policy was warranted at this meeting. The outlook for economic activity had weakened considerably since the January meeting, and members viewed the downside risks to economic growth as having increased. Indeed, some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market."

This view was substantiated to a large degree by the Fed's staff economic forecast which lowered its growth forecast - although not calling for a recession as severe as some. The Fed staff still sees recovery in the second half of 2008.

"In the forecast prepared for this meeting, the staff substantially revised down its projection for the pace of real GDP throughout 2008. The staff projection showed a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half."

There were several themes about the lowering of the forecast for economic growth. These included a continuing credit crunch, depressed housing and with its effect on the consumer, a weaker labor sector, and higher energy costs weighing on the consumer.

"Several participants noted that the problems of declining asset values, credit losses, and strained financial market conditions could be quite persistent, restraining credit availability and thus economic activity for a time and having the potential subsequently to delay and damp economic recovery. Participants noted that the contraction in the housing sector had deepened and that considerable uncertainty surrounded the outlook for housing."

"Rising energy prices were also damping growth in real incomes. One participant reported that lenders were restricting draws on home equity lines, and the tightening of credit availability more generally was probably starting to constrain consumer spending. Also, the continued fall in home prices and declines in equity prices were weighing on household wealth, with a depressing effect on spending. The outlook for business spending had also dimmed since the time of the January meeting."

Curiously, the minutes did not elaborate much on the JP Morgan takeover of Bear Stearns, noting the following.

"On March 14, the Federal Reserve Board approved the temporary financing arrangement announced that morning by JPMorgan Chase & Co. and The Bear Stearns Companies Inc. On March 16, the Federal Reserve announced the creation of a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. In addition, the Federal Reserve lowered the primary credit rate, or discount rate, 25 basis points to 3.25 percent, and extended the maximum maturity of primary credit loans to ninety days from thirty days. It also approved the longer-term financing arrangement announced that evening by JPMorgan Chase and Bear Stearns in conjunction with the acquisition of Bear Stearns by JPMorgan Chase."

The Fed recognized that inflation is still a problem but seemed to be engaged in wishful thinking about solving the problem. The Fed gives a long list for why inflation is high but then simply relies on weaker economic growth to lead to an easing of inflation.

"The recent information on inflation was seen as disappointing. With the exception of the February report on consumer prices, readings on inflation had generally been elevated. Agricultural prices were rising at a substantial clip, partly in response to strong global demand, lean supplies, and a lower foreign exchange value of the dollar. Other commodity prices also were climbing rapidly, and crude oil prices were near record levels. Several participants stated that business contacts had emphasized that their input costs were rising and that they were seeking to pass on higher costs to their customers. Some participants, however, expressed the view that emerging economic slack would limit the extent to which firms could pass on their higher costs and could serve to damp inflation more generally. Moreover, available data and anecdotal reports suggested that unit labor costs were rising only modestly, and thus were seen as unlikely to exert significant upward pressure on prices. Weaker growth, both in the United States and abroad, should also contribute to a flattening of oil and other commodity prices over time, which would also reduce price pressures and the threat of rising inflation expectations. On balance, most participants still expected inflation to moderate later this year and in 2009. However, the recent depreciation of the dollar could boost import prices and thus contribute to higher inflation. Moreover, with both core and headline inflation having been somewhat elevated, participants expressed some concern that inflation expectations might become less firmly anchored. Even with a substantial easing at this meeting, most members saw overall inflation as likely to moderate in coming quarters, reflecting a projected leveling-out of energy and commodity prices and an easing of pressures on resource utilization."

The bottom line is that the Fed has a difficult situation to address in terms of unfreezing the current credit crunch while at the same time anticipating when the recent liquidity injections should be withdrawn so as to help bring inflation down. As noted by FOMC members, the current issues are complex with subprime asset valuation still an issue, consumer debt becoming an issue, housing still some time from recovery, but with world-wide demand keeping inflation a nagging problem. While there is a good chance that the economy will recover in the second half, there is little reason to expect it to be robust-and inflation will still be lingering.

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