Fed casts shadow on growth prospects
Federal Reserve policymakers lowered their growth forecast in October and worried about credit-market losses, even as they described the interest-rate cut as a "close call".
"Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity," according to minutes of the Federal Open Market Committee's October 30-31 meeting. "Many members noted that this policy decision was a close call."
The records of the gathering were accompanied by estimates and language that highlighted risks to growth, in contrast to the October statement that said the risks to the expansion and inflation were "roughly" equal. Traders anticipate the central bank will be forced to trim borrowing costs again next month.
"This does not sound like a close call to us, more of a no-brainer," said Ian Shepherdson, chief US economist at High Frequency Economics in Valhalla, New York. "We can be pretty sure that if the outlook continues to deteriorate and markets remained distressed, they'll be easing again soon enough."
FOMC members predicted growth could slow next year to as low as 1.8 percent, according to the middle range of forecasts. The numbers are "notably below" the 2.5 percent to 2.75 percent anticipated in June, the Fed said.
Inflation, as measured by the personal consumption expenditures price index excluding food and energy, will be 1.7 percent to 1.9 percent, down from 1.75 percent to 2 percent.
Greater 'uncertainty'
"Most participants judged that the uncertainty attending their October projections for real gross domestic product growth was above typical levels seen in the past," the Fed said. "In contrast, the uncertainty attached to participants' inflation projections was generally viewed as being broadly in line with past experience."
The projections, provided as an addendum to the minutes, are the product of a one and half year review of Fed communication that Chairman Ben Bernanke initiated to improve the public's understanding of policy makers' objectives.
The FOMC reduced the benchmark rate by a quarter-point on October 31, to 4.5 percent, after a half-point move in September. Kansas City Federal Reserve Bank President Thomas Hoenig dissented, preferring no change. The minutes say Hoenig felt "that policy needed to be slightly firm to better hold inflation in check".
Fed officials have faced a challenge from financial markets on their neutral outlook for policy.
Federal funds futures quoted on the Chicago Board of Trade at 2:15 pm in New York indicate a 86 percent chance of a quarter-point rate cut on December 11, and 67 percent odds of a further move on January 30. Treasury notes rose and the dollar remained lower.
Traders are betting that year-end funding strains among banks and brokers will curtail lending and slow growth. Analysts predict that writedowns by banks and securities firms, already $50 billion worldwide, will continue to rise as losses mount on securities linked with subprime US mortgages.
The minutes contain several references to policymakers' concerns about financial stability, which they said could affect the outlook for growth.
"Participants generally viewed financial markets as still fragile and were concerned that an adverse shock - such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses - could further dent investor confidence and significantly increase the downside risks to the economy," the minutes said.
Barclays assessment
"Under these forecasts of growth slowing a bit, and core inflation not coming off, they still moved to a balanced risk assessment" in October, said Michael Pond, interest-rate strategist at Barclays Capital Inc in New York. "That should be taken as relatively hawkish."
Yields on two-year Treasury notes touched 3.12 percent on Tuesday, the lowest since January 2005, as investors sought a haven in government debt.
"Even with some easing of monetary policy, participants expected economic growth to slow over the next few quarters, reflecting continued sharp declines in the housing sector and tighter lending standards and terms across a broad range of credit products," the minutes said.
"The slowing in growth was likely to produce a modest increase in the unemployment rate."
The minutes showed that policymakers paying close attention to surveys and anecdotes that might indicate a turn in sentiment. Consumer spending should "continue to advance at a moderate rate" supported by income gains, the minutes said, while there was a risk that weaker home prices could "further sap consumer confidence".
"Moderate" growth in business spending was also projected by policymakers. "Nevertheless, business sentiment appeared to have eroded somewhat amid heightened economic uncertainty."
Bloomberg News
(China Daily 11/22/2007 page16)
