(RTTNews) - The forecast from members of the Federal Open Market Committee deteriorated significantly in the period between their October and December meetings, the minutes from the FOMC’s December meeting revealed Tuesday. The policy-making arm of the Federal Reserve is expecting economic weakness to extend throughout 2009, a bleak outlook that prompted them to slash the federal funds rate to record low levels.

“Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010,” the Fed noted in the minutes.

There will be a “moderate recovery” in 2010, the central bank added.

“Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term” the minutes read.

In addition, homebuilding was expected to decline, and business spending was also on the downturn.

“All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede,” the minutes read.

Some FOMC members saw that the financial market crisis combined with a loss of consumer wealth and the global nature of the recession led to the “the distinct possibility of a prolonged contraction.” However, that worst case scenario was not judged as the most likely outcome, according to the minutes.

Deflation is also a concern, as participants warned that inflation could “drop for a time below rates they viewed as most consistent over time with the Federal Reserve’s dual mandate for maximum employment and price stability.”

There is an “adverse feedback loop” between financial markets and the real economy, Fed officials noted at the last policy meeting, according to the minutes. Poor performance in financial markets was reflected in the wider economy, and vice-versa, creating a negative feedback loop that could pull the economy into a prolonged recession.

Consumer spending was also recognized as an area of concern, as participants noted that the “decline in household wealth resulting from large drops in equity and house prices, together with tighter credit conditions, rapidly increasing unemployment, and deteriorating consumer sentiment, was contributing to a sharp contraction in consumer spending.”

In the short term, consumer spending is needed to pull the economy out of recession. However, as consumers save, which is “desirable in the long term,” it makes it more difficult for the economy to move back to a positive gross domestic product.

Inflation led to some disagreement among meeting participants. Although the decline in energy and commodity prices has taken considerable strain off inflation, how low inflation would fall was a source of some debate.

“Some saw inflation leveling out near desired levels, while others expressed concern that inflation might decline below levels consistent with price stability in the medium term,” the minutes read.

Disinflationary dynamics, or deflation, was a special concern for “several participants” who said monitoring that in light of the weak economy “would be especially important going forward.”

At its meeting on December 15th - 16th the Federal Reserve established a target range for the federal funds rate from zero to one-quarter percent Tuesday, bringing the target to its lowest level in over 50 years.

In the accompanying statement, the Federal Reserve also pledged to purchase agency and mortgage-backed securities.

“Over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant,” the Fed said.

The vote to establish a funds rate with a target range between 0.0 and 0.25 percent was unanimous.

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