Fed sees economy sliding further
By David Lawder and Glenn Somerville
Federal Reserve policy-makers, faced with bleaker forecasts for a rapidly worsening recession, decided to buy a "substantial" amount of U.S. Treasury and mortgage debt to halt the slide, minutes of their most recent meeting showed on Wednesday.
Staff economists for the Federal Open Market Committee lowered projections for U.S. real gross domestic product in the second half of 2009 and 2010, indicating a more gradual recovery. However the minutes, which were from the central bank's March 17-18 meeting, did not offer any revised figures.
"The deterioration in labor market conditions was rapid in recent months, with the steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and the build up of some inventory overhangs," the Fed said in the minutes.
The Fed had already given up on any growth in 2009 when it released its last quarterly forecasts in February, saying that the U.S. economy would shrink 0.5 percent to 1.3 percent for the year. At that time, it anticipated a 2010 rebound to growth of 2.5 percent to 3.3 percent.
But the Fed staff forecasts indicated the GDP decline would flatten out gradually over the second half of 2009 and then turn to expansion "slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through and the correction in housing activity comes to an end."
The revisions caused the Dow Jones industrial average to turn negative and other indexes to pare gains amid renewed worries about the health of the economy. The dollar extended its drop against the yen, while longer-dated U.S. Treasury debt held onto price gains.
"The assessment of the economy is very bad. This is clearly a big problem that they are worried about," said Robert Brusca, chief economist at Fact and Opinion Economics in New York, adding that he saw very little encouraging language.
The Fed minutes said FOMC members particularly noted a sharp fall in foreign activity that was reducing exports as a key development since their January meeting.
WHAT TO BUY?
At the conclusion of the March 17-18 meeting, the Fed announced plans to buy up to $300 billion of longer-term U.S. Treasury securities and an additional $850 billion of agency mortgage debt to deal with the weak economic outlook. It agreed to keep its benchmark federal funds rate in a zero to 0.25 percent range.
But there was some division among members over which securities to buy and the appropriate amount, given the expansion of the Fed's balance sheet through a new securities loan program.
"One member preferred to focus on additional purchases on longer-term Treasury securities, whereas another member preferred to focus on agency MBS (mortgage-backed securities). However, both could support expanded purchases across a range of assets, and several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain,"
Fed policy-makers saw little chance of a pickup of inflation as rising unemployment and falling capacity utilizations were holding down wages and prices.
"Several expressed concern that inflation was likely to persist below desired levels, with a few pointing out the risk of deflation," the minutes said.
RECOVERY TIMING UNCERTAIN
The Fed participants expressed a wide variety of views about the strength and timing of recovery, and did not interpret an uptick in housing starts as the beginning of a new trend, although there was only "limited scope for housing to fall further."
They noted some signs of stabilization in consumer spending in January and February, but said the fear of unemployment could damp consumption growth in the near term.
FOMC members said they anticipated demand for funds from the Fed's new Term Asset-backed Securities Loan Facility would be modest initially, and some firms might be reluctant to borrow from TALF out of concern about potential future changes in the government's policies for financial rescues.
Some members also expressed concern about risks that expansion of the Term Asset-backed Securities Loan Facility would raise if it were expanded to include older and lower-quality assets.
The U.S. Treasury a few days later announced plans to expand the TALF to include older commercial and residential mortgage-backed securities as a way to help clear problem assets off bank balance sheets.