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Fed Minutes Flashing Caution

Posted by Larry Doyle on July 14, 2010 3:24 PM |

The Federal Reserve just released the minutes from a June 22-23 meeting and an early May conference call. The Fed as an institution is always careful in its delivery, but in reading through their tea leaves this afternoon I sense concern on the Fed’s part of a real  slowing, if not a double dip, in our economy. A summary of the Fed minutes includes the following highlights:

FOMC participants’ forecasts for economic activity and inflation suggested that they expected the recovery to continue and inflation to remain subdued, but with, on balance, slightly weaker real activity and a bit lower inflation than in the projections they made in conjunction with the April 2010 FOMC meeting.

…participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period. Participants also revised down a little their projections for inflation over the forecast period.

I read these minutes as: Growth is slowing. Job prospects remain dismal. Disinflation and outright deflation are the primary concerns.

Several participants noted that these revisions were largely the result of the incoming economic data and the anticipated effects of developments abroad on U.S. financial markets and the economy. Overall, participants continued to expect the pace of the economic recovery to be held back by a number of factors, including household and business uncertainty, persistent weakness in real estate markets, only gradual improvement in labor market conditions, waning fiscal stimulus, and slow easing of credit conditions in the banking sector.

There are real economic issues abroad, but also very much here at home as well.

Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years. About one-half of the participants now judged the risks to the growth outlook to be tilted to the downside, while most continued to see balanced risks surrounding their inflation projections. Participants generally continued to judge the uncertainty surrounding their projections for both economic activity and inflation to be unusually high relative to historical norms.

It is going to take a while for things to improve. Economic risks indicate things may get worse, and potentially decidedly worse, before they get better.

Against this backdrop, the Federal Reserve also highlighted in today’s minutes that it may need to implement another round of stimulus. What can the Fed do when its Fed Funds rate is already resting at a 0-.25% level? Another round of quantitative easing via a variety of mechanisms at their disposal.

The simple fact remains our economy continues to labor under the stress and strain of what Sense on Cents defines as ‘walking pneumonia.’


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