ABS-CBN News Online Beta

Fed minutes: may need more rate cuts if growth ebbs

Reuters | 11/20/2008 8:03 AM

Printer-friendly version | Send to friend

WASHINGTON – Federal Reserve officials slashed economic growth forecasts through 2009 and some believed even deeper interest rate cuts may be needed if growth slows further, minutes of their October policy meeting show.

"Even after today's 50 basis-point action, the committee judged that downside risks to growth would remain," the Fed, the US central bank, said in minutes released on Wednesday.

"Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings," the minutes of the October 28-29 meeting said.

US stocks added to losses, and Treasury debt prices rallied as the minutes hammered home the gloomy outlook for economic growth and sent investors running for safety. The dollar fell against the yen.

The Fed lowered its forecast range for 2008 gross domestic product growth to between zero and 0.3 percent from its June projection of 1.0 to 1.6 percent. The economy could shrink by 0.2 percent in 2009, according to the lower range of the Fed's central tendencies forecast.

The Fed cut rates to 1 percent from 1.5 percent at its scheduled October meeting, after a surprise half-point cut October 8 in coordination with major central banks around the world in an effort to stabilize financial markets. It has taken the benchmark federal funds rate down 3.25 percentage points in six steps since the beginning of the year.

With expectations of growth ebbing, officials at the US central bank pushed their unemployment projections sharply higher to between 6.3 and 6.5 percent for 2008 and between 7.1 and 7.6 percent next year.

Some on the Fed think the economy could shrink by 1 percent in 2009 and that unemployment could go as high as 8 percent, the highest since 1984. The jobless rate reached 6.5 percent in October.

Fed officials said they expect the economy to contract moderately in the second half of 2008 and the first half of 2009, and acknowledged that risks to growth had increased.

"While some expected an improving financial situation to contribute to a recovery in growth by mid-2009, others judged that the period of economic weakness could persist for some time," the Fed said.

The minutes showed Fed officials with a new worry: the possibility of a deflationary spiral that they lack power to counteract because interest rates are already so low.

"If resource utilization remained weak for some time, inflation could fall below levels consistent with the Federal Reserve's dual mandate for promoting price stability and maximum employment," the minutes said.

Such a development "would pose important policy challenges in light of the already-low level of the committee's federal funds rate target," the Fed said.

In a development fueling fears of deflation, consumer prices fell by 1 percent in October, the steepest drop since the government began monthly records in 1947, a Commerce Department report showed on Wednesday.

The Fed's next scheduled interest-rate setting meeting is December 16. Markets fully expect a half-point rate cut at that meeting, as indicated by short-term interest-rate futures.

as of 11/20/2008 8:03 AM