re..4.9%growth..oops ..nadine you are living in the past...wake up a smell the economy.
"Growth for all 2008 is projected at 2.3 percent."
Fed Officials Cut Growth Outlook at Last Meeting, Minutes Show
By Scott Lanman
Jan. 2 (Bloomberg) -- Federal Reserve officials lowered their economic growth outlook for 2008 and agreed to be ``exceptionally alert'' as they decided to reduce interest rates by a quarter-point at last month's meeting.
Policy makers ``agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook,'' the Federal Open Market Committee said in records of the Dec. 11 session, released today in Washington. ``Members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen.''
Fed officials anticipated growth that was ``somewhat more sluggish'' than they anticipated in October, while refraining from signaling a bias to lower rates further, citing ``heightened uncertainty.'' By contrast, traders anticipate another reduction this month and a fifth straight cut at the March meeting to stave off recession.
Some FOMC members said the chance of further tightening of lending standards may restrain economic expansion and ``require a substantial further easing of policy.'' At the same time, officials judged that a rapid improvement in financial conditions would mean ``a reversal of some of the rate cuts might become appropriate,'' the minutes showed.
The quarter-point cut disappointed investors seeking a larger move and caused the biggest stock sell-off after a Fed decision since Chairman Ben S. Bernanke, 54, took office in 2006. Bernanke, approaching the midpoint of his four-year term, has sought to separate the Fed's strategies of extending the six-year economic expansion and alleviating financial strains.
Rate Expectations
Traders increased bets today the Fed will lower the target rate for overnight loans between banks by a half-point to 3.75 percent on Jan. 29. The likelihood rose to 24 percent, from zero yesterday, based on contracts quoted on the Chicago Board of Trade. Futures show a 76 percent chance of a quarter-point move.
Investors anticipate that policy makers will lower borrowing costs further to help sustain the six-year economic expansion. The Institute of Supply Management today reported that its gauge of U.S. manufacturing slumped to the weakest in almost five years.
Signs of distress in bank funding and credit markets have diminished since the Fed acted in concert with counterparts in Europe to inject funds into money markets. The Fed, European Central Bank, Swiss National Bank, Bank of England and Bank of Canada announced the initiative a day after the FOMC meeting.
The premium of three-month dollar loans between banks over U.S. Treasury bills maturing in the same period fell today to the lowest in almost two months. The so-called ted spread has fallen as the three-month London Interbank Offered Rate for the dollar dropped to 4.68 percent from 5.13 percent Dec. 10.
Funding Tool
The U.S. central bank last month introduced a new tool, the Term Auction Facility, to provide funds to banks beyond the one- day maturity in the federal funds market. The Fed held two auctions totaling $40 billion and plans two this month, with continued sales ``for as long as necessary,'' the Fed said Dec. 21.
Fed officials also announced Dec. 12 a $24 billion swap-line with the ECB and Swiss National Bank to help meet demand for dollars among banks in Europe. Some economists questioned why the Fed waited a day before announcing the step, instead of indicating its plans in the Fed statement the day before.
Today's minutes disclosed that the FOMC and Board of Governors discussed the auctions and swaps in a Dec. 6 conference call, and the FOMC wasn't unanimous in endorsing the plans. St. Louis Fed President William Poole dissented from the swaps agreement, saying they were ``unnecessary'' because of the size of the ECB's dollar reserves.
Board Vote
The Board of Governors approved the auction facility in a Dec. 10 notation vote, the minutes showed.
``A few'' officials ``questioned the need for and the likely efficacy of the proposal, expressed concerns about about the longer-run incentive effects of a TAF, and felt that the possible drawbacks could well outweigh any benefits,'' minutes of the Dec. 6 call said.
The U.S. economy, the world's largest, grew at a 1 percent pace in the fourth quarter after expanding at a 4.9 percent rate the previous three months, according to the median estimate of economists surveyed by Bloomberg News last month. Growth for all 2008 is projected at 2.3 percent.
The Fed's statement last month said that ``some inflation risks remain.''
Inflation, measured by the Commerce Department's personal consumption expenditures price index minus food and energy, was 2.2 percent in November, the highest since March. Fed officials in October forecast the ``core'' gauge will rise 1.6 percent to 1.9 percent in 2010, an indication of their preferred longer-term range.
Oil Climbs
Today, crude oil futures rose to a record $100 in New York, while gold reached $863.10, the highest for a most-active contract since January 1980, on the Comex division of the New York Mercantile Exchange.
While Fed policy makers expected core inflation to ``trend down a bit over the next few years,'' officials were still ``concerned about upside risks to inflation stemming from elevated prices of energy and non-energy commodities; some also cited the weaker dollar.''
Housing figures show the industry has yet to indicate a bottom to the slump, now in its third year. In November, sales of new homes fell more than economists forecast to a 12-year low, while sales of previously owned homes unexpectedly rose only as prices declined, reports showed the past week.
``Participants agreed that the housing correction was likely to be both deeper and more prolonged than they had anticipated in October,'' the minutes said.
Investors may get more detail on the Fed's direction in remarks from Vice Chairman Donald Kohn tomorrow at a conference in New Orleans. In November, Kohn reinforced forecasts for a December rate cut by highlighting concern about ``deterioration'' in financial markets.
Also, the Labor Department on Jan. 4 releases its monthly employment report, among the most closely watched releases for Fed officials and economists.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net |
