fundamental alert

FOMC Minutes Reflect Deflation Concerns, Downgraded Growth and Inflation Forecasts

Wednesday, 18 February 2009 18:01:15 GMT  |  Terri Belkas, Currency Strategist

The Federal Open Market Committee's (FOMC) meeting minutes from January yielded few surprises, but in an effort to be more transparent, the central bank started to issue longer-term forecasts for growth, unemployment, and inflation (see below).  Meanwhile, FOMC members apparently discussed on January 16 the prospect of creating an inflation target, and while they did not make a decision, today's press release shows that many FOMC members "judged that a longer-run PCE inflation rate of 2 percent would be consistent with the dual mandate," which is in line with the inflation targets of other central banks, such as the Bank of England and European Central Bank.

Meanwhile, the FOMC's assessment of the current situation both economically and financially was bleak, though not entirely unexpected. The one thing that the markets may hone in on is that some FOMC members see some risk for deflation, especially since Friday's release of US CPI is forecasted to fall negative for the first time since 1955. Another interesting note was that Richmond Fed President Jeffrey Lacker was the sole dissenter on the motion to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets, as he "preferred to expand the monetary base by purchasing US Treasury securities rather than through targeted credit programs." 


Federal Reserve economic projections:

Real GDP Central tendency
                                   2008 Est.              2009 Est.            2010 Est.           2011 Est.
 Jan. 28, 2009              n/a             -1.3% to -0.5%       2.5% to 3.3%     3.8% to 5.0%
 Oct. 29, 2008    0.0% to 0.3%      -0.2% to  1.1%        2.3% to 3.2%     2.8% to 3.6%

Real GDP Range
                                    2008 Est.             2009 Est.             2010 Est.          2011 Est.
  Jan. 28, 2009              n/a               -2.5% to 0.2%      1.5% to 4.5%     2.3% to 5.5%
  Oct. 29, 2008      -0.3% to 0.5%    -1.0% to 1.8%     1.5% to 4.5%     2.0% to 5.0%

Unemployment Rate Central tendency
                                    2008 Est.             2009 Est.             2010 Est.          2011 Est.
  Jan. 28, 2009                n/a              8.5% to 8.8%       8.0% to 8.3%    6.7% to 7.5%
  Oct. 29, 2008        6.3% to 6.5%    7.1% to 7.6%       6.5% to 7.3%    5.5% to 6.6%

Unemployment Rate Range
                                    2008 Est.             2009 Est.             2010 Est.          2011 Est.
  Jan. 28, 2009               n/a                 8.0%-9.2%            7.0%-9.2%       5.5%-8.0%
  Oct. 29, 2008          6.3%-6.6%         6.6%-8.0%           5.5%-8.0%       4.9%-7.3%

PCE Price Index Central tendency
                                    2008 Est.             2009 Est.             2010 Est.          2011 Est.
  Jan. 28, 2009                n/a                 0.3%-1.0%           1.0%-1.5%      0.9%-1.7%
  Oct. 29, 2008          2.8%-3.1%          1.3%-2.0%           1.4%-1.8%     1.4%-1.7%

PCE Price Index Range
                                    2008 Est.             2009 Est.             2010 Est.          2011 Est.
  Jan. 28, 2009               n/a                -0.5%-1.5%            0.7%-1.8%     0.2%-2.1%
  Oct. 29, 2008          2.7%-3.6%         1.0%-2.2%            1.1%-1.9%     0.8%-1.8%

Core PCE Price Index Central tendency
                                    2008 Est.             2009 Est.             2010 Est.          2011 Est.
  Jan. 28, 2009                n/a                 0.9%-1.1%          0.8%-1.5%        0.7%-1.5%
  Oct. 29, 2008          2.3%-2.5%         1.5%-2.0%          1.3%-1.8%        1.3%-1.7%
 

Core PCE Price Index Range
                                    2008 Est.             2009 Est.             2010 Est.          2011 Est.
  Jan. 28, 2009               n/a                  0.6%-1.5%          0.4%-1.7%       0.0%-1.8%
  Oct. 29, 2008         2.1%-2.5%           1.3%-2.1%          1.1%-1.9%      0.8%-1.8%

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