The Fed’s Forecast

The Lehmann Letter ®

On February 18 the Federal Reserve released the most recent minutes of the Fed’s Open Market Committee, which sets the federal funds rate:
http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20090128.pdf

The Fed’s near-term projection has become increasingly gloomy, with a consensus that the economy will shrink in 2009. The forecast concluded, however, that recovery would begin in the second half of 2009 in response to expansionary monetary and fiscal policies.

“Participants’ projections for the change in real GDP in
2009 had a central tendency of -1.3 to -0.5 percent,
compared with the central tendency of -0.2 to 1.1 percent
for their projections last October. In explaining
these downward revisions, participants referred to the
further intensification of the financial crisis and its effect
on credit and wealth, the waning of consumer and
business confidence, the marked deceleration in global
economic activity, and the weakness of incoming data
on spending and employment. Participants anticipated
a broad-based decline in aggregate output during the
first half of this year; they noted that consumer spending
would likely be damped by the deterioration in labor
markets, the tightness of credit conditions, the continuing
decline in house prices, and the recent sharp
reduction in stock market wealth, and they saw reductions
in consumer demand contributing to further
weakness in business investment. However, participants
expected that the economy would begin to recover—
albeit gradually—during the second half of the
year, mainly reflecting the effects of fiscal stimulus and
of Federal Reserve measures providing support to
credit markets.”

The Fed is not in the business of needlessly raining on anyone’s parade. If it says the recession appears worse now than last fall, you can believe it.

© 2009 Michael B. Lehmann