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Federal Reserve Statement July 15, 2009

Posted by Larry Doyle on July 15, 2009 3:50 PM |

The minutes of the Federal Reserve Open Market Committee meeting from June 23-24 were just released. Let’s not take anything on face value, so bring some tools as we review and continue navigating our economic landscape.

For the diehards in the audience, here are the actual minutes, including voting results, for your reading pleasure.

For those who may choose a synopsis complete with graphics, I submit the Fed’s Summary of Economic Projections.

What do we learn? For those not familiar with Fed policy and procedures, the target goals of the Federal Reserve are maximum employment and stable prices.  Where do Fed governors think the economy stands now and where are we headed? They measure our economic health in terms of output growth, that is GDP (gross domestic product), unemployment, and inflation.

Output Growth Projections

>FOMC participants generally expected that, after declining over the first half of this year, output would expand sluggishly over the remainder of the year.

>Almost all participants viewed the near-term outlook for domestic output as having improved modestly relative to the projections they made at the time of the April FOMC meeting, reflecting both a slightly less severe contraction in the first half of 2009 and a moderately stronger, but still sluggish, recovery in the second half. With the strong adverse forces that have been acting on the economy likely to abate only slowly, participants generally expected the recovery to be gradual in 2010.

>Participants’ projections for the change in real GDP in 2009 had a central tendency of negative 1.5 percent to negative 1.0 percent, somewhat above the central tendency of negative 2.0 percent to negative 1.3 percent for their April projections. Participants noted that the data received between the April and June FOMC meetings pointed to a somewhat smaller decline in output during the first half of the year than they had anticipated at the time of the April meeting.

>Participants expected, however, that recoveries in consumer spending and residential investment initially would be damped by further deterioration in labor markets, the continued repair of household balance sheets, persistently tight credit conditions, and still-weak housing demand. They also anticipated that very low capacity utilization, sluggish growth in sales, uncertainty about the economic environment, and a continued elevated cost and limited availability of financing would contribute to continued weakness in business fixed investment this year. Some participants noted that weak economic conditions in other countries probably would hold down growth in U.S. exports. A number of participants also saw recent increases in some long-term interest rates and in oil prices as factors that could damp a near-term economic recovery.


>Even though all participants had raised their near-term outlook for real GDP, in light of incoming data on labor markets, they increased their projections for the path of the unemployment rate from those published in April. Participants foresaw only a gradual improvement in labor market conditions in 2010 and 2011, leaving the unemployment rate at the end of 2011 well above the level they viewed as its longer-run sustainable rate.

>Their projections for the average unemployment rate during the fourth quarter of 2009 had a central tendency of 9.8 to 10.1 percent, about 1/2 percentage point above the central tendency of their April projections and noticeably higher than the actual unemployment rate of 9.4 percent in May–the latest reading available at the time of the June FOMC meeting. All participants raised their forecasts of the unemployment rate at the end of this year, reflecting the sharper-than-expected rise in unemployment that occurred over the intermeeting period. With little material change in projected output growth in 2010 and 2011, participants still expected unemployment to decline in those years, but the projected unemployment rate in each year was about 1/2 percentage point above the April forecasts, reflecting the higher starting point of the projections.


>The central tendency of participants’ projections for personal consumption expenditures (PCE) inflation in 2009 was 1.0 to 1.4 percent, about 1/2 percentage point above the central tendency of their April projections. Participants noted that higher-than-expected inflation data over the intermeeting period and the anticipated influence of higher oil and commodity prices on consumer prices were factors contributing to the increase in their inflation forecasts. Looking beyond this year, participants’ projections for total PCE inflation had central tendencies of 1.2 to 1.8 percent for 2010 and 1.1 to 2.0 percent for 2011, modestly higher than the central tendencies from the April projections. Reflecting the large increases in energy prices over the intermeeting period, the forecasts for core PCE inflation (which excludes the direct effects of movements in food and energy prices) in 2009 were raised by less than the projections for total PCE inflation, while the forecasts for core and total PCE inflation in 2010 and 2011 increased by similar amounts.

Overall, I read this sumamry as an admission by Fed governors that the economy has currently achieved a degree of stability with risks still skewed toward slower growth. In regard to unemployment, it is likely we will have a protracted level of heightened unemployment for a sustained period. On the inflation front, we have some concerns about increasing inflation although it is not imminent.

Over and above these consensus opinions, it is notable that the range of opinions amongst Fed governors is extremely wide. That to me spells real uncertainty as well.

On the topic of the Fed’s balance sheet, the governors do not believe they will need to implement more quantitative easing.

Staff projections suggested that the size of the Federal Reserve’s balance sheet might peak late this year and decline gradually thereafter.

Taken in totality, our economic patient is certainly not dead nor a vegetable. That is the good news. However, in reading these minutes, the patient’s quality of life remains in serious question.


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