In its Oct 28-29 meeting the Federal Reserve made it clear that it could invoke a near zero interest rate policy (ZIRP) if the economic perspective continued to worsen. Rates below the current 1.0% have not been seen in 50 years. The U.S. economy contracted -0.3% in the third quarter and may force Fed governors “to further lower its target for the federal funds rate in the future” if output continues to plunge. “Some suggested that additional policy easing could well be appropriate at future meetings,” according to Fed minutes from the latest meeting. In the three weeks leading up to the meeting, the bank slashed rates 100bp. Despite such aggressive action, FOMC board members thought “substantial downside risks” would remain. In June the reserve had forecast 2009 GDP growth to range between 2.0% and 2.8%. Developments over the last two months have led them to again cut their outlook for the following year. GDP growth is to range between -0.2% and 1.1% in the upcoming year, according to their estimates. As if that wasn’t enough, the contraction is expected to last through at least mid-2009. Labor markets are also expected to continue deteriorating. Fed estimates call for a year-end unemployment rate of between 6.3% and 6.5%, an increase from the previous forecast of 5.5% and 5.7%. The rate may increase beyond the upper limit of the revised forecasts in the two months ending the year. October alone saw 6.5% of the labor force without work. A continued economic slowdown would only proliferate the jobs crisis. On inflation the Fed remained optimistic, stating that the rate of price increases would “diminish materially in coming quarters” to “levels consistent with price stability.” Wednesday’s Consumer Price Index release lent credence to their position as the metric shrank by -1.0%. Excluding food and energy from the mix, the metric shrank -0.1%, bringing the yearly core inflation rate to 2.2%. The rate of expected inflation declination is of some concern, however. “Some saw a risk that over time inflation could fall below low levels consistent with the Federal Reserve’s dual mandate of price stability and maximum employment,” minutes showed.