Bernanke & Co. released the minutes from the last two meeting and for one surprise conference call we did not know about.
Some very interesting notes (in order of placement in the minutes):
After the scheduled January meeting the Fed observed:
The subsequent release of the minutes of the meeting elicited little market reaction. However, investors did mark down the expected path of policy in response to speeches by Federal Reserve officials; the speeches were interpreted as suggesting that signs of broader economic weakness and additional financial strains would likely require an easier stance of policy. The Committee’s decision to reduce the target federal funds rate 75 basis points on January 22 surprised market participants and led investors to mark down further
the path of policy over the next few months.
In their discussion of the economic situation and outlook, and in the projections that they had submitted for this meeting, participants noted that information received since the December meeting had been decidedly downbeat on balance. In particular, the drop in housing activity had intensified, factory output had weakened, news on business investment had been soft, and conditions in labor markets appeared to have deteriorated. In addition, consumer confidence had remained
low and business confidence appeared to have worsened. Although the functioning of money markets had improved notably, strains remained evident in a number of other financial markets, and credit conditions had become generally more restrictive.
Against this backdrop, participants expected economic growth to remain weak in the first half of this year before picking up in the second half, aided in part by a more accommodative stance of monetary policy and by likely fiscal stimulus. Further ahead, participants judged that economic growth would continue to pick up gradually in 2009 and 2010. Nonetheless, with housing activity and house prices still declining and with financial conditions for businesses and households tightening further, significant uncertainties surrounded this outlook and the risks to economic growth in the near term appeared to be weighted to the downside. Indeed, several participants noted that the risks of a downturn in the economy were significant.
To be sure, some positive financial developments were evident. Banks appeared to be making some progress in strengthening their balance sheets, with several financial institutions able to raise significant amounts of capital to offset the large losses they had suffered in recent quarters.
Participants agreed that the inflation data that were received since the December meeting had been disappointing. But many believed that the slow growth in economic activity anticipated for the first half of this year and the associated slack in resource utilization would contribute to an easing of price pressures. Members were also mindful of the need for policy to promote price stability, and some noted that, when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate.
(Read the minutes here.)
What is interesting is the concern with the market's reaction to the decisions. My guess is that with household wealth diminished by dramatic housing value declines in key markets, whereas the Fed might not be so inclined to pay attention to the stock market's reaction, they want to avoid further deterioration in wealth by a declining stock market.
With housing expected to be depressed until 2009, it would seem the Fed will be very accommodative to the market until then. That being said, we can expect further rate cuts going into the spring and summer and depending what happens with inflation, possibly the fall.