Fed Pares Growth Forecast, Calls October Cut 'Close' (Update2)
By Craig Torres and Scott Lanman
Nov. 20 (Bloomberg) -- Federal Reserve policy makers lowered their growth forecast in October and worried about credit-market losses, even as they described the interest-rate cut as a ``close call.''
``Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,'' according to minutes of the Federal Open Market Committee's Oct. 30-31 meeting. ``Many members noted that this policy decision was a close call.''
The records of the gathering were accompanied by estimates and language that highlighted risks to growth, in contrast to the October statement that said the risks to the expansion and inflation were ``roughly'' equal. Traders anticipate the central bank will be forced to trim borrowing costs again next month.
``This does not sound like a close call to us, more of a no-brainer,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. ``We can be pretty sure that if the outlook continues to deteriorate and markets remained distressed, they'll be easing again soon enough.''
FOMC members predicted growth could slow next year to as low as 1.8 percent, according to the middle range of forecasts. The numbers are ``notably below'' the 2.5 percent to 2.75 percent anticipated in June, the Fed said.
Inflation, as measured by the personal consumption expenditures price index excluding food and energy, will be 1.7 percent to 1.9 percent, down from 1.75 percent to 2 percent.
Greater `Uncertainty'
``Most participants judged that the uncertainty attending their October projections for real gross domestic product growth was above typical levels seen in the past,'' the Fed said. ``In contrast, the uncertainty attached to participants' inflation projections was generally viewed as being broadly in line with past experience.''
The projections, provided as an addendum to the minutes, are the product of a 1 1/2-year review of Fed communication that Chairman Ben S. Bernanke initiated to improve the public's understanding of policy makers' objectives.
The FOMC reduced the benchmark rate by a quarter-point on Oct. 31, to 4.5 percent, after a half-point move in September. Kansas City Federal Reserve Bank President Thomas Hoenig dissented, preferring no change. The minutes say Hoenig felt ``that policy needed to be slightly firm to better hold inflation in check.''
Fed Versus Markets
Fed officials have faced a challenge from financial markets on their neutral outlook for policy.
Federal funds futures quoted on the Chicago Board of Trade at 2:15 p.m. in New York indicate a 86 percent chance of a quarter-point rate cut on Dec. 11, and 67 percent odds of a further move on Jan. 30. Treasury notes rose and the dollar remained lower.
Traders are betting that year-end funding strains among banks and brokers will curtail lending and slow growth. Analysts predict that writedowns by banks and securities firms, already $50 billion worldwide, will continue to rise as losses mount on securities linked with subprime U.S. mortgages.
The minutes contain several references to policy makers' concerns about financial stability, which they said could affect the outlook for growth.
``Participants generally viewed financial markets as still fragile and were concerned that an adverse shock -- such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses -- could further dent investor confidence and significantly increase the downside risks to the economy,'' the minutes said.
Barclays Assessment
``Under these forecasts of growth slowing a bit, and core inflation not coming off, they still moved to a balanced risk assessment'' in October, said Michael Pond, interest-rate strategist at Barclays Capital Inc. in New York. ``That should be taken as relatively hawkish.''
Yields on two-year Treasury notes touched 3.12 percent yesterday, the lowest since January 2005, as investors sought a haven in government debt.
``Even with some easing of monetary policy, participants expected economic growth to slow over the next few quarters, reflecting continued sharp declines in the housing sector and tighter lending standards and terms across a broad range of credit products,'' the minutes said. ``The slowing in growth was likely to produce a modest increase in the unemployment rate.''
Anecdotes, Surveys
The minutes showed that policy makers paying close attention to surveys and anecdotes that might indicate a turn in sentiment. Consumer spending should ``continue to advance at a moderate rate'' supported by income gains, the minutes said, while there was a risk that weaker home prices could ``further sap consumer confidence.''
``Moderate'' growth in business spending was also projected by policy makers. ``Nevertheless, business sentiment appeared to have eroded somewhat amid heightened economic uncertainty.''
Fed officials have said they expect job growth, record exports and business spending will help sustain the expansion through the recession in housing. Government figures today showed no sign of a bottom for homebuilding, as residential construction permits slumped to their lowest level since 1993.
Bernanke told congressional lawmakers at a Nov. 8 hearing the Fed expected ``a more reasonable growth pace'' by the U.S. spring of next year. Fed Governor Randall Kroszner said Nov. 16 that data confirming a ``rough patch during the next year'' would not ``by themselves suggest to me that the current stance of monetary policy is inappropriate.''
Preferred Measure
Fed policy makers have sought to limit the risks to growth while preventing a jump in expectations for inflation. The central bank's preferred gauge of consumer prices, which excludes food and energy costs, rose 1.8 percent in September from a year ago. Officials are wary of any pass-through from soaring energy and commodity costs and a falling dollar.
``The easing of policy at this meeting seemed unlikely to affect adversely the outlook for inflation,'' the minutes said. ``A number of members noted that the recent policy moves could readily be reversed if circumstances evolved in a manner that would warrant such action.''
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net
Last Updated: November 20, 2007 14:36 EST |
