Fed minutes reveal pessimism

Federal Reserve policy makers last month predicted the US economy will contract through the middle of 2009, with some prepared to cut interest rates further in response, according to a record of their meeting.
 
''Some suggested that additional policy easing could well be appropriate at future meetings,'' the Fed said in minutes of the October 28-29 Federal Open Market Committee gathering released today. ``In any event, the Committee agreed to take whatever steps were necessary to support the recovery.''
 
Fed officials lowered their forecasts for inflation and gross domestic product to account for the choking off of credit to households and businesses as some of the biggest US financial companies failed. Some FOMC members foresaw a risk that the inflation rate will fall below the Fed's objective of ''price stability.''
 
''Participants generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009 and agreed that the downside risks to growth had increased,'' according to the minutes.
 
The Fed at the meeting cut its benchmark interest rate to 1%, matching a half-century low, in an effort to avert the worst recession since World War II.
 
Fed officials lowered their economic growth projections to 0% to 0.3% for 2008 from 1% to 1.6%, according to the median forecast of Fed governors and district- bank presidents. They predict growth next year of between negative 0.2% and 1.1%, down from 2 to 2.8% in June.
 
Inflation forecast
 
The panel estimated 2008 inflation, excluding food and energy at 2.3% to 2.5%, from 2.2% to 2.4% in June. The Commerce Department's so-called core personal consumption expenditures price index is seen rising 1.5% to 2% next year, compared with forecasts of 2 to 2.2% in June.
 
''Some saw a risk that over time inflation could fall below low levels consistent with the Federal Reserve's dual mandate of price stability and maximum employment,'' the minutes said. Some Fed officials felt ''more aggressive easing should reduce the odds of a deflationary outcome.''
 
The Oct. 29 FOMC statement said ''the pace of economic activity appears to have slowed markedly'' while inflation was expected ``to moderate in coming quarters to levels consistent with price stability.''
 
Bernanke remarks
 
Fed Chairman Ben S. Bernanke said yesterday in testimony to the House Financial Services Committee that ''there are some signs that credit markets, while still quite strained, are improving.''
 
''However, overall, credit conditions are still far from normal,'' he said.
 
Government figures today showed the cost of living in the US fell last month by the most on record and construction began on the fewest homes ever, evidence the economy is in the worst recession in at least a quarter century.
 
The consumer price index plunged 1% last month, the most since records began in 1947, the Labor Department said in Washington. Commerce Department figures showed housing starts tumbled to an annual rate of 791,000, indicating the industry's contraction may extend into a fourth year.
 
The US economy may contract at a 3% annual pace this quarter, the median estimate in a Bloomberg News survey of 59 analysts this month. Economists don't expect growth to resume until the three months ending in September 2009. The US economy shrank at a 0.3% annual rate last quarter, the most since the 2001 recession.
 
''We are navigating the mother of all financial storms,'' Dallas Fed President Richard Fisher said Nov. 4. A recovery in the US economy ''will take time,'' Fisher said. ''I don't see any economic growth in 2009. None.''
 
The Fed is forecast by economists to reduce the federal funds target rate to 0.75% by the end of December and 0.50% in the first quarter. The federal funds rate was last below 1% a half century ago, when Dwight Eisenhower was president.

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