(RTTNews) - Unsurprisingly, the minutes released on Tuesday by the FOMC showed a sharp downgrade of growth expectations, with members expecting “economic activity to contract sharply in the fourth quarter of 2008 and in early 2009. Most projected the economy would begin to recover slowly in the second half of 2009.”

However, uncertainty remains high, and downside risks “were a serious concern,” say the analysts at UBS. FOMC members expected inflationary pressures “to moderate further in coming quarters.” These projections are about in line with our own. Weak GDP through H1, followed by modest recovery in H2; an unemployment rate peak of 8.3% in Q4; and core PCE inflation slowing to 1.0% on a Q4/Q4 basis in 2009 from 1.8% in 2008.

The Fed outlined its three-part policy. First is the low fed funds rate. Second is an aggressive communication policy. And third is continued balance sheet expansion.

Along with the funds rate and balance sheet expansion, Fed officials also discussed how their communications could help “support the resumption of sustainable economic growth” In the FOMC statement they declared the expectation that the funds rate would stay exceptionally low for some time. In addition, there was some discussion of the possibility of officials providing “a more explicit indication of their views on what longer run rate of inflation would best promote their goals of maximum employment and price stability.” According to the minutes, “the added clarity in that regard might help forestall the development of expectations that inflation would decline below desired levels, and hence keep real interest rates low and support aggregate demand.”

The Fed already publishes Fed officials’ “central tendency projections” (CTPs) for inflation for the next three years, with the longer-term projections generally interpreted as fairly indicative of the pace viewed as consistent with “price stability.” The October FOMC minutes showed CTPs for 2011 (likely not overly influenced by the current turmoil) of 1.4 to 1.7 percent for total PCE prices and 1.3 to 1.7 percent for core PCE prices.

This is something to watch for in the next FOMC statement. Unlike his predecessor, Chairman Bernanke has been a strong advocate of formal inflation targeting-and if formal is not feasible, at least informal. He believes it helps prevent inflation expectations from being too high, or low.

FOMC members expect that “during the period of financial turmoil” the balance sheet will be “maintained at a high level,” and they considered expansion of existing liquidity facilities and creation of new facilities. “Some” also believed that “quantitative targets for an increasing reserve base could be effective” - in effect, supporting a policy of quantitative easing. However, “several” saw that type of quantitative easing “might not have a significant stimulative effect.” They prevailed, although the FOMC effectively tabled the discussion. “Going forward, consideration will be given to whether various quantitative measures would be useful in calibrating and communicating the stance of monetary policy.”

In the end, there was broad consensus-a consensus not always achieved by this FOMC-on the unusually declarative FOMC statement, with its commitment to the maintenance of a low funds rate “for some time” and to aggressive expansion of the Fed’s balance sheet.

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Posted in Categories: Economy, Releases, USA.

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