FOMC Minutes
How much can we read from the Minutes? Time will tell!
Here is one opinion:
The minutes from the Federal Open Market Committee Meeting of Oct. 28-29 conveyed a line of thinking by committee members that was largely expected.
To be sure, it wasn’t lost on committee members that a fed funds rate back at 1.00% presented both opportunity for the economy and increased challenges for policy makers in their aim to achieve price stability.
There was agreement that inflation would diminish materially, yet some members acknowledged the risk that inflation could fall below the Fed’s goal. The view held by some officials, though, was that the aggressive easing would cut the risk of deflation.
The general observations about the forces weighing on economic activity were consistent with what has been heard in speeches since the meeting. We won’t rehash them here.
If anything, it was the revisions to the central tendencies of the Fed’s economic projections (see below) that grabbed the market’s attention.
In light of what has transpired in recent months, it was no surprise that we would see downward revisions. Still, the magnitude of the revisions and the expectation that real GDP “would contract somewhat in the first half of 2009″ were sobering factors that weighed on investor sentiment.
The market recognizes that the direction of the revisions is headed the right way, but since the revisions are considerably different from the numbers provided less than five months ago, there isn’t a lot of confidence yet in the new projections being entirely credible.
It’s worth noting that Fed officials think real GDP will rise in the second half of 2009, with the result that real GDP will be about unchanged for the year, and that the contraction in the housing market will come to an end in 2010.
Given recent economic and earnings reports, the market is finding it difficult to embrace any forecasts that conveniently anticipate the economy returning to growth mode in the second half of next year. In that vein, it certainly hasn’t been lost on the market that the forecasting path always seems smoother six months down the road.
As the saying goes, “Time will tell.” Right now, the prevailing economic view for the market is half empty because it hasn’t found much in the hard economic data to think otherwise.
–Patrick J. O’Hare
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